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Death of a myth: Wage hike does not lead to inflation

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When Germany’s largest labour union, IG Metall, agreed to a 5.2 per cent wage rise last November, monetary policymakers breathed a great sigh of relief. As reported in Financial Times, this deal finally eased central banks’ inconvenient wage-price spiral fears.

The fear that wage increases will lead to price increases (and hence inflation) is quite widespread. We see that not only the Germans but also the British live with the same concern. Bank of England President Andrew Bailey says the wage bargain needs to be “restrained” or things will get out of hand. Jason Furman, who was the Director of the National Economic Council under Barack Obama, is also clear: Increasing wages also increases prices. According to Furman, this is “basic micro and common sense.”

European Central Bank President Christine Lagarde said they would look at the increase in wages to see if they would continue to raise interest rates in Europe. Last May, Lagarde rejected bank employees’ desire to link wage increases to consumer price increases and wrote that this was “not acceptable and desirable”.

Klaas Knot, president of the Bank of the Netherlands, who has been skeptical about wage increases at the level of inflation, said they should be on high alert for any “feedback loop” to wage and price increases, but added that current wage developments do not provide clear evidence that they are entering a wage-price spiral in the eurozone.

Federal Reserve Chair Jerome Powell has made the most explicit statement. In explaining why they’re raising interest rates; Powell makes it clear that they want to reduce demand and lower wages. Powell thinks they can do all this without slowing the economy and putting it in recession. However, clearly, interest rate hike aims to reduce the bargaining power of the working class and suppress wages by increasing unemployment.

What is the wage-price spiral?

The technical wage-price spiral recipe: at least three out of four consecutive quarters have a wage-price spiral if both consumer prices and nominal wages increase. To give a more concise definition, price increase triggers the wage increase, and wage increase causes the capital owner to increase the prices, and so on.

The debt between Thomas Weston, a leader of the carpenter’s union, and Karl Marx at the International Working Men’s Association in 1865 is the historical example of this issue. Just like the central banks argue today, Weston said that capitalists reflected the increase in wages to increase in prices to protect their profits; increasing prices would reduce the purchasing power of workers and thus keep real wages in place. That is, Watson concluded that a struggle or bargain for wage increases was useless.

Marx’s answer to this is summarized in the manuscript we know as Value, Price, Profit. Marx presents three arguments against Weston: First, wage increases come to the fore not out of the blue, but usually as a reaction to rising prices. Second, wages don’t cause inflation, but multiple factors influence it: The size of production, the productive forces of labor, the value of money, fluctuations in market prices, and the different phases of industrial cycles. So, for example, under the condition that wages remain the same, a change in the amount of money in the market (or the value of money) can trigger inflation. Or, again, a change in labor efficiency (i.e., productivity) has a direct impact on commodity prices, provided wages remain the same.

Moreover, according to Marx, it is true that a general rise in wage levels reduces overall profit rates, but this does not directly affect the prices of commodities. Capitalists and their ideologists object to the increase in wages, not because prices will increase, but because profits will decrease. The physical limit here is to provide the means of livelihood required for the employee working today to work tomorrow. However, Marx says that in some examples, the wage received by the workers can be pushed below the minimum subsistence. Such a reduce in labor costs is compensated by charity on national scope or laws on supporting the poor. Hence, the question of how to detect wages and profits is answered dynamically, not statically, and the answer is determined by the opposing classes’ struggles and balances of power.

It will happen again: The claim that workers’ “excessive” demands for wages will lead to inflation is an assumption raised by the capitalist and his ideologists, who know that their profits will decrease. Now, it is time talk about the cracks on this front.

IMF’s confession 

IMF economists are finding it very difficult to find the evidence they have been looking for from history for a wage-price spiral. A recently published article examines wage-price spirals in the last 60 years of advanced economies.

The conclusion reached by IMF economists is that wage-price spirals are difficult to find in recent historical records, at least when they are defined as a continuous increase in prices and wages. Moreover, the IMF has even more difficulty in finding the wage-price spiral in other historical periods when real wages has fallen like today. What happens is the nominal wage increases that only partially replace the real wage loss.

The examples found by the economists showing fall in real wages and tight labour market as experienced today, often prioritize a period of falling inflation and rising nominal wages. Thus, as economists describe it as a “surprise,” sustained wage and price increases in only a small part of the example are being rolled over to the next period. As a result, the IMF finds that the rise in nominal wages cannot necessarily be taken as a sign that a wage-price spiral period has begun.

The International Labour Organisation (ILO) also confirms this situation. In the first half of 2022, global monthly wages declined by 0.9 per cent in real terms. When wages in developed countries are separated from wages in developing countries, the ILO report shows that real wages in developed G20 countries decreased by 2.2 per cent, while in developing countries they increased by only 0.8 per cent. Looking at the United States and Canada, it is understood that real wages decreased by 3.2 per cent in the first half of this year.

The OECD report complements this statement. The report, which includes third-quarter data, suggests real wages decline in 31 of 32 major countries in the third quarter of 2022 compared to the same period the previous year.

President and CEO of the Federal Reserve Bank of San Francisco, Mary C. Daly also has had to admit that one of the most fundamental elements of the wage-price spiral is that the rising wage phenomenon has not emerged with inflation.

The ILO says that inflation is not caused by wage increases, but by the Ukrainian war and the global energy crisis.

Sources of inflation

Paul Donovan, the chief economist of UBS, one of the world’s largest asset managers, reminds that real wages are falling globally, pointing out that the Fed’s wage-price spiral thesis is not correct.

According to Donovan, the main source of today’s inflation is the excessive increase in profits. If inflation comes from profit rather than labor, says Donovan, central banks should look for other ways alternative to shrinking demand based on increasing unemployment.

A graphic published by the Economy Policy Institute last April provides the picture. Unit labour cost constituted 61.8 per cent of the increase in unit prices in non-financial companies between 1979-2019. Between the fourth quarter of 2021 and the second quarter of 2022, this rate decreased to 7.9 per cent. The main factor driving the increase in unit prices is profit with 53.9 percent. It is composed of non-work input prices with 38.3 percent.

So, what else is among the sources of inflation? The decrease in supply chains and labor productivity during the COVID period and the inadequate supply afterwards is a reason. Zero COVID policies in China and the subsequent Russia-Ukraine war also has caused disruptions in global supply chains and cost increases. Sanctions against Russia have also led to an exorbitant rise in global energy prices.

Moreover, in Britain, for example, service providers that distribute to retail energy companies and are often owned by large hedge funds and private equity companies can make profits of up to 40 per cent. These companies, known as the “Big Six,” have almost completely monopolized energy supplies. 99 per cent of domestic and small business customers depend on the Big Six. When the huge profits of international energy monopolies such as BP, Shell, Exxon, Chevron, Total is added, the picture is completed. The UK energy distribution companies, which have been privatized since the 1980s, work for profit and households suffer for it. The figure says it all: The Big Six distributed a £23 billion dividend to shareholders. That’s almost six times the tax the Six have been paying over the last decade.

On the other hand, excessive profit rates in 2021 are expected to decrease with the rise in interest rates. It is certain that there will be a slowdown in the profits and therefore investments driven by the increases in energy and raw material prices last year. The downward trend in large tech companies that made huge profits during the pandemic period, layoffs, and the difficulty in accessing finance also indicate that recession is likely in advanced economies next year.

Moreover, since the source of inflation is not “excessive demand” but weak supply, central banks have nothing to do with it. In addition to the disruption of supply chains, the Ukrainian war, and anti-Russian sanctions, decrease in profitability, declining labour productivity and investment appetite do not seem to match supply with demand. While recruitment in the United States is still in full swing, the lack of pace in GDP growth suggests that the problem of labour productivity in developed countries remains. The emergence of a sustained and downward demand shock in the world system therefore seems preordained.

Europe

Vučić scrapped plan to hold power after phone warnings, report says

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Former Serbian President Aleksandar Vučić was preparing to retain power by force following the country’s parliamentary elections, according to a report by the British newspaper The Times, citing politicians and a former commander of a specialised police unit.

However, he abandoned this scenario after receiving phone calls urging him to back down.

Spasoje Vulević, the former head of the Serbian police counter-terrorism unit, told the newspaper that 4,000 police officers and 3,000 people whom he described as “thugs” were deployed to central Belgrade on voting day, 25 October.

According to Vulević’s assessment, Vučić was preparing to reject the election results.

Vučić’s spokeswoman denied the claim. Speaking to The Times, she said the police presence in Belgrade was a response to threats of violence from protesters and was unrelated to any attempt to seize power.

Member of the European Parliament Sandro Gozi also said he received alarming messages from diplomatic sources on election day indicating that Vučić was preparing for a scenario involving the use of force.

According to the newspaper, Gozi’s political group issued a statement around 21:00 local time, as initial projections were being released, warning that supporters of Vučić’s party could be mobilized to provoke clashes.

Where did the calls forcing Vučić to back down come from?

Radomir Saičić, a leading candidate from the winning Student List, also argued that plans had been made to alter the results by force if the vote margin between the sides was narrow.

“If the results were close, there were plans to overturn the outcome of the vote by brute force,” Saičić said. “However, according to the information I obtained, numerous calls to him from the police and other figures prompted him to change his mind. They convinced him that executing this plan would end very badly for him.”

Former commander Vulević, on the other hand, was sceptical that police officers could have played a decisive role.

Noting that Vučić personally selected the unit commanders in Belgrade and that these figures were unlikely to oppose him, Vulević said: “I suspect that representatives of European governments called Vučić; these were talks conducted at the highest level.”

European Parliament member Gozi did not confirm the claim that the telephone calls had a decisive effect.

“I cannot rule out the possibility that phone calls took place, but in any case, the vote margin against him was far too large,” Gozi said. “Vučić was stunned.”

According to The Times, roads were closed in Belgrade during the evening, gendarmerie personnel appeared on the streets, and groups of men dressed in black headed toward the city’s Pioneers Park (Pionirski Park).

Vulević claimed these individuals arrived in groups of 20 to 30. However, the newspaper reported that at 21:30, an hour and a half after polls closed, Vučić backed down and his assembled supporters dispersed.

From the Novi Sad collapse to early election defeat

Early parliamentary elections were held in Serbia on 25 October.

According to Election Commission data, after processing results from 8,139 ballot boxes, the Student List secured 52.65% of the vote, while Vučić’s United Serbia coalition remained at 39.22%.

Vučić conceded defeat without waiting for the final results.

“It is obvious that we have lost these elections. The Student List has won,” the politician said, attributing the opposition’s success to support from European countries and the US “deep state”.

Prior to the election, the country was the scene of prolonged mass protests that began after the collapse of a railway station canopy in the city of Novi Sad in November 2024.

Protesters initially demanded accountability for those responsible and an investigation into corruption allegations, before subsequently calling for the government’s resignation.

Having dissolved parliament in September 2026 and announced his resignation from the presidency, Vučić was subsequently nominated as the candidate for prime minister by his party.

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EU scrambles for takers for remaining €21B in SAFE defence loans

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The European Commission has until the end of the year to convince EU member states to take up around €21 billion in unused defence loans and support Ukraine’s defence.

The worsening security situation in the Black Sea could encourage Romania to seek additional loans. Bucharest has already secured €16.7 billion under SAFE.

The remaining figure became final after Hungary and Italy significantly scaled back their requests under the EU’s €150 billion Security Action for Europe (SAFE) programme.

On Wednesday, after approving Hungary’s spending plan, the final pending application, the Commission announced that it would soon launch a second call for applications.

The situation is very different from August 2025, when Brussels was confident that demand would far exceed the available €150 billion.

Applications from 19 EU countries eventually exceeded that sum by around €40 billion.

Now, national elections and pressure on public finances may make governments reluctant to take on additional debt.

Some EU diplomats told Rapporteur that the conditions for the second round remain unclear, making it difficult to say whether their countries would apply.

The Commission must publish the second call by the end of December. Unlike the first round, where countries could use the loans for national procurement contracts until May 2026, the remaining money must be spent on joint procurement.

Poland benefited from the previous flexibility, securing €43.7 billion, the largest national allocation, and moved quickly to sign contracts.

Warsaw announced that 90% of the money would go to Polish companies.

Brussels also hopes the remaining money will be used to bolster Ukraine’s defence.

In July, during an official visit to the country, Commission President Ursula von der Leyen suggested that around €10 billion in unused SAFE loans could be directed to Kyiv.

Defence Commissioner Andrius Kubilius mentioned the Freyja anti-ballistic missile project among the initiatives under consideration while discussing the second SAFE call at an E5 meeting in Paris this week.

Military sources told Rapporteur that participation in the second round had been considered under Romania’s previous government, but the proposal would now require a fresh political assessment.

Diplomatic sources in Athens told Rapporteur that Greece has also shown interest. The country had previously made an unsuccessful push to increase its allocation by several billion euros.

Polish Deputy Defence Minister Magdalena Sobkowiak-Czarnecka told Polish media this week that Poland was also discussing the conditions for another possible application, while Ireland has shown interest in the remaining funds.

Italy, having already reduced its initial request, is considered unlikely to participate in the second round.

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EU prepares Ukraine peace mission to Abu Dhabi led by Björn Seibert

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The European Union is preparing to take a direct role in the diplomatic negotiations surrounding the war in Ukraine.

According to a report by Euronews television, the European Commission and the European Council are establishing a joint delegation of high-ranking officials to attend an upcoming round of talks between the parties. Björn Seibert, the head of cabinet to European Commission President Ursula von der Leyen, will lead the delegation.

The German diplomat, described in the report as an influential bureaucrat, is expected to head the team attending the talks scheduled to take place in Abu Dhabi in early November.

“We are strongly committed not only to ending the war, but also to achieving a just and lasting peace. This is our goal, and this is precisely the position we defend in the current talks,” a European Commission representative said in a statement on the matter.

Brussels’s key figure behind the scenes

A European bureaucrat of German descent, Björn Seibert has long been recognized as von der Leyen’s closest aide.

Seibert first joined von der Leyen’s team in 2013 during her tenure as Germany’s defence minister, later moving with her to the European Commission.

According to reporting by Politico magazine, Seibert gradually developed into one of the most powerful figures behind the scenes of European politics.

The magazine noted that Seibert has been directly involved in clearing senior appointments and has played an influential role in managing relations with both the European Parliament and the US.

This setup has also sparked controversy within the institution. Critics claim that concentrating power in the hands of the cabinet chief and von der Leyen leads to excessive centralization in administration, whereas supporters argue the model ensures rapid, efficient decision-making.

If these multilateral contacts materialize to bring together delegates from Europe, Ukraine, the US, and Russia under one roof, they will mark the first talks held in this specific format during the peace process.

Diplomatic engagements so far have been conducted either bilaterally between Russia and the US or as trilateral meetings that included Ukraine.

However, the EU delegation’s participation at the negotiating table is not yet finalized, as the issue remains under consultation.

European capitals have actually spent months searching for a similar diplomatic channel. Politico reported in January that EU member states had discussed appointing a special envoy to lead talks with Moscow over Ukraine, an effort backed by French President Emmanuel Macron and Italian Prime Minister Giorgia Meloni.

The Telegraph newspaper reported in October that, alongside Meloni, Finnish President Alexander Stubb, Czech President Petr Pavel, Norwegian Prime Minister Jonas Gahr Støre, and Danish Prime Minister Mette Frederiksen were being mentioned for the European representative role.

The newspaper noted that officials were also weighing the option of creating a joint delegation of representatives instead of choosing a single figure.

Reservations from Moscow over European intentions

Moscow, for its part, views Europe’s position as potentially decisive in resolving the conflict. “It is not enough to talk only with Kyiv; it is necessary to talk with the whole of Europe, which fully backs Kyiv in its desire to prolong the conflict. Perhaps Europe’s stance is of key importance here,” Russian Presidential Aide Yuriy Ushakov said.

Kremlin spokesman Dmitriy Peskov also stated that Moscow would support the emergence of an EU negotiator. “Having a negotiator is good. If that negotiator genuinely seeks to contribute to a peaceful settlement, it would be much better,” Peskov said.

Conversely, Russian Foreign Minister Sergey Lavrov struck a cautious tone on 27 October regarding European countries’ interest in joining the talks. Lavrov stated that Europe wants a seat at the table without altering its outlook toward Moscow.

Arguing that Europe disregards Russia’s position on the root causes of the conflict, Lavrov emphasized that European nations do nothing beyond levelling accusations and demanding a halt to hostilities.

“This merely demonstrates the Europeans’ desire to join the negotiation process. However, the positions with which they would enter the process remain a major question mark,” the Russian minister said.

Despite these conflicting signals, Russian President Vladimir Putin previously noted that Moscow has not closed the door to dialogue with European nations.

As a preferred European negotiator, Putin previously named former German Chancellor Gerhard Schröder.

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