Rishi Sunak says public sector pay rises will fuel inflation. Economists say they won’t

Rishi Sunak has said he cannot raise public sector wages because doing so will fuel inflation.

The government has warned of a “wage-price spiral”, also known as wage-push inflation, in which prices rise (inflation) due to higher wages which, in turn, increase prices in a perpetual loop.

As more workers go on strike this month demanding their pay matches or beats inflation – which stands at 10.7% – two economics experts have told Sky News the government is not correct in its assessment.

They agreed increasing public sector wages would not push up inflation.

Dr Ethan Ilzetzki
Associate professor of economics, London School of Economics

“It’s very wrong-minded of the government to approach it in this way,” Dr Ilzetzki said.

“Private sector wages do feed into inflation – wages increase, costs increase and they want to pass that on to the consumer.

“So private sector wages are more likely to lead to inflation or a wage-price spiral but there’s no similar way that the public sector could cause inflation.

“The caveat is, of course, an increase in public expenditure could lead to inflation and public wages are one way public expenditure is increased, but the government could increase wages and cut other parts of the budget.”

He said the conflict between the government and public sector workers is essentially political and about “who burdens the cost”.

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The Bank of England’s job is to keep inflation close to 2%, he added, so “the first order of business is to bring inflation down” to that figure.

“The Bank of England always has the ability to bring inflation down, even if its caused by global energy prices or geopolitical conflict,” Dr Ilzetzki said.

“That does have a cost: the further slowing down of the economy which has already plummeted, so the Bank of England does have an unenviable task but it has a very clear mandate to keep prices at a constant level.”

He added that the friction between the unions and the government is “about taking responsibility for economic problems” that politicians “need to address”.

Professor Alex Bryson
Professor of quantitative social science, University College London

“The government’s concern with wage-push inflation is misconceived as they’re missing much of the bigger picture: unemployment and shrinking of the size of the economy,” Prof Bryson said.

“Past periods of recession inflation were often followed by deflation – this happened in 2008.

“But this episode is different, the chief reason [for inflation rising] was not wage-push but COVID-induced restraints, which hike prices but will die back over time, as well as energy prices and ongoing uncertainty over Ukraine.”

He said unemployment rates have been low for a long time and wages have been relatively stagnant, which has meant workers’ arguing power is “not so great”.

“There are more benefits for the government paying public sector workers more than not, it’s conceivable they could benefit from an increased low turnover, which would cost the public less than it does now,” he said.

“Even a substantial pay rise will not see public sector workers catching up on the pay gap with the private sector that has been widening since 2010.”

Prof Bryson said he thinks the UK is already in recession and it will be “long and deep”.

“We’re seeing a deeper recession than is currently identified, we saw that before with the great recession of 2008 so you would expect that would normally mean a spike in unemployment,” he said.

“Surveys in recent months show an increased proportion of indexes in the labour market saying unemployment will rise in the next 12 months.

“That will mean GDP is lower than it currently is which will mean inflation will start to fall.”

He added that at the moment, the government should be more worried about high non-employment – those not in work and not seeking work – and underemployment – those who want to work more hours but do not have the opportunity to.

“Their focus should be on reducing the rate at which real wages are falling,” Prof Bryson said.

“It’s not clear to me whether the government will be able to hold their line on wage-push inflation, especially if the unions are holding out as they seem to be.”