UK real wages falling

Last month, in a post called ‘Chart of the day: real hourly earnings‘ I said that U.S. real wage rates were lower today than they were a generation ago on the eve of the first oil hock. hat’s pretty poor.

Today ‘UK Bubble‘ highlights the fact that real wages in the UK have been falling for 4 year, since before he bubble in housing burst.

She says:

In May real wages fell by almost 1 percent. In fact, wage growth has been stagnant for over a year.

The question as elsewhere in Europe is whether inflation will lead to pay rises. This has already happened in Germany and is one reason the ECB rightfully raised interest rates.

In contrast, the U.S. has interest rates at 2%, while inflation is running at well over 4% with more inflation in the pipeline. How can rates continue at 2%? The last time producer prices were as high as they are now, interest rates were at double-digit levels.

Producers paid 9.2 percent more for goods from June 2007, the biggest year-over-year increase since June 1981.
Bloomberg News, 15 Jul 2008

It looks like the Fed wants to bail out its buddies on Wall Street and Fannie and Freddie at your expense. According to ex-Fed Governor William Poole, the Fed wants inflation.

Back in the UK, the same dynamic is underway. What will the BoE do in response? I’d wager they will do nothing. After all, they have the exact same problems as the Fed.

Recent wage settlements were based on expectations of lower inflation. Now that inflation is picking up, the UK is drifting towards a wage-price spiral. In January, a new round of wage negotiations begin.

You have to read the post a UK bubble to see the graph on real wages. It’s not pretty. With high debt, low savings, burst housing bubbles and economies in recession, the U.S. and the UK are two peas in a pod.

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