What Mark Carney Didn’t Say

Today, the Bank of England announced that interest rates will remain at historic lows, as long as unemployment remains above 7%. Mark Carney was careful to communicate that reducing unemployment was “not a target” – the target remains inflation, and if inflation starts to rise then so will interest rates.

Our masters in the political and business elite always prefer to talk about us as consumers, rather than producers, because it obscures the real structure of power. Nowhere is this more apparent than in discussion of inflation. To a consumer, inflation is a measure of rising prices – but to a producer, inflation is a measure of rising wages. The two are always closely tied.

From the Great Depression to the late 1970s, British governments accepted that they should target full employment. By the 1970s, this caused a new crisis – if you know that there are plenty of other jobs you could take, you will not hesitate to demand better pay, better conditions, and more respect. Strikes were common and inflation was high.

Their early solution, under Thatcher, was to target a certain level of unemployment, to keep wages down. That language wasn’t very popular, so by the 1990s central banks took to targeting inflation – with unemployment as an “unavoidable” consequence.

Readers of a certain vintage may remember that back in 1998, then-governor “Steady” Eddie George was astonished by widespread outrage at his comment that “lost jobs in the North are an acceptable price to pay to curb inflation in the South”.

What Mark Carney told us today is that the current 7.8% unemployment rate is too high, but that 7% might be as low as we want to go. He’ll wait and see what effect that has on wages.

Thanks, Mark.

    • Stu
    • August 8th, 2013

    Thanks Alistair! Being pretty dumb at economics, am bit confused by your statement that inflation is a measure of higher wages? Surely at moment we’re seeing prices rising, while wages stagnate, because of credit for consumers, and low militancy/organisation allowing employers to cream ever more profit off the top from producers??

      • mohkohn
      • August 8th, 2013

      Aye you’re not wrong – prices can of course rise faster or slower than wages, or there would never be any change in our wealth! Changes in the rate of price inflation serve as a pretty decent proxy for changes in the rate of wage inflation.

      Paul Volcker, former head of the federal reserve, used to carry around a wee card with the dates of upcoming major wage negotiations. Shortly before them, he would raise interest rates, encouraging companies to drive a hard bargain.

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