What You Are Actually Targeting
A Pay Rise Is Not an Inflation Forecast
Wages rising 5% tells you nothing until you know what happened to output per hour and what happened to margins.
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What a firm must charge depends on what an hour of labour costs it per unit of output, not on what the hour costs. Pay rising 5% while output per hour rises 5% leaves the cost of making a thing unchanged. The rest is the labour share — how much of the price is labour at all — and the margin, which is the part that was argued about throughout 2022 and is genuinely in the arithmetic.
Inflation implied by costs
4%
Labour, other costs, and margin
- Unit labour cost growth
- 4.5%
Wages minus productivity
Output per hour — the thing that makes a pay rise free
Firms widening or conceding
Reach 2% implied inflation with wage growth still at 5.5% or above
- Try -2% — not yet
- Try 4% — not yet
- Reach 2% implied inflation with wage growth still at 5.5% or above — not yet
Answer to continue.