I picked up a snippet on the news last night about inflation and pay raises that confuses me a lot (and has for a while). This is my understanding, which I know is not complete, so please correct me where I'm wrong—maybe you can help me get to an answer to my question.
I know that pay raises are a source of inflation because they put more disposable income in people's hands which results in more spending, which results in inflation (alternatively people could use that money to save—does that positively impact on inflation?). Inflation pretty much means that the reserve bank has to increase its supply of money to the market.
In our current monetary regime the reserve bank targets inflation (CPIX in particular) which effectively means that they are trying to keep the cost of living and doing business from rising too quickly. To keep pressure under control the reserve bank raises interest rates, which effectively takes money out of people's pockets and curbs consumer spending (and hopefully encourages saving too, as better returns can be made with higher interest rates).
So as I've said, pay raises are a source of inflation. Let's assume that an average blue collar worker can pay their bills and put food on the table, after that there is not too much left over (just an assumption for this question). The reserve bank is effectively saying that pay raises should be around about the inflation levels (i.e. 0% real increase in pay) to keep inflation under control. So if pay raises increase with inflation, all that your "average" worker can do after a pay raise is still just pay bills and put food on the table—no room for saving or an increase in lifestyle (both of which stimulate the economy?).
My question is, if the "average blue collar worker" wants to increase their standard of living, how can they do this?
My perception is that managers and higher level workers get pay increases above inflation. It just seems like the poor workers can't win. Am I missing some important factor or understanding of the situation?
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