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The real cost of inflation

If the government were to announce that it was cutting the wages of all workers there would be uproar. Yet this is exactly what they have done by calling for ‘pay restraint’ and capping all wage rises at 2%. A below-inflation pay ‘rise’ is a pay cut. No amount of statistical trickery changes this fact.

The government’s favoured measure of inflation, the Consumer Price Index (CPI) is currently running around 3.3%. However, this excludes mortgage repayments. Does that mean we don’t have to pay them back out of our falling wages? No such luck. The inflation measure that does include these payments is called the Retail Price Index (RPI). It is currently running at around 4.3%. So by the government’s own figures they are imposing a pay cut of over 2%.

However, the official figures don’t tell the whole story. Inflation is calculated by taking the average prices of a ‘typical basket of goods,’ including such items as bread and butter, digital radios and flat screen TVs. However, if prices of essentials are rising while prices of gadgets are falling – which they are, we simply spend more on essentials and less on luxuries, and our standard of living falls even though overall prices may appear quite stable. The Telegraph calculated a ‘Real Cost of Living Index’ of 9.5%, taking into account rocketing food and energy costs.

Inflation is already being blamed on ‘greedy’ workers demanding they maintain their standards of living, despite wages in the economy as a whole failing to keep up with inflation over the past decade.

The irony here is that Gordon Brown built his ‘prudent’ reputation by keeping wages down – and profits up – while the economy grew. But a growing economy requires growing consumption. How are we to consume more if our wages aren’t keeping up? The ‘answer’ was cheap credit for all to plug the gap; a pyramid scheme reliant on rising house prices - the reason we are up to our eyeballs in debt.

Now that the housing market has begun to fall and credit is beginning to dry up, inflation is doing the dirty work. Behind all the talk of the ‘credit crunch’ and rising oil prices, inflation is just the latest means to a familiar end – employers always want us to do more work for as little pay as they can get away with (just consider unpaid overtime, understaffing, increasing workloads...).

Therefore the only way to fight the current pay cuts is to fight for our own interests against theirs; regardless of the state of the economy our standard of living is only ever as low as we let them push it or as high as we can win through collective action.

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