I’m writing this after May’s headline inflation was reported as having reached 9.1%, the highest for 40 years and well above the Bank of England’s ‘target’ of 2%.
However, by the time you read this, it’s very likely to be even more, probably into double figures.
Until recently, a column about the topic of price rises would probably win this paper’s award for the least read for the year – or ever.
But now, the impact of inflation on households, businesses and the wider economy has pushed COVID19 to one side, as the most challenging issue facing the country.
And I believe it to be more serious than the pandemic, unless tackled thoroughly. Indeed, I consider it imperative that the public policy responses to the impacts of escalating prices are smarter and delivered in a more coherent manner than those used to curtail the spread of COVID19.
Firstly, the basics. Why is high inflation, especially when experienced over a number of quarters and years, such a problem?
Well, it basically destroys the value of work and risk-taking. As Lionel Shriver recently wrote in The Spectator: “It’s often said that inflation is a tax, but it’s worse than that. It’s theft.”
Small and medium-sized Suffolk businesses – including my own - have been reporting increasing price pressures for well over a year.
Research by the business body, the Suffolk Chamber of Commerce, shows that increasing numbers of firms, especially those unable to pass these onto customers, are beginning to see their margins squeezed, their cash flow reduced, and so are starting to wind in their investment in training and in plant and machinery.
This is not a good sign, suggesting reduced productivity and growth in the future.
For households the situation is also worrying. The increases in food, fuel and energy prices are disproportionally hitting poorer households, as they spend a much larger share of their total household spending on such basics.
For example, the bottom 10% of households, in terms of income, spend on average almost three times as much of their budgets on gas and electricity, compared to the highest-income tenth (11% versus 4%).
Analysis of ONS data by the Institute for Fiscal Studies, suggest that the bottom 10% of the population in terms of income, faced an inflation rate which was three percentage points higher than the real inflation rate of the richest 10%.
Not much levelling up there, then.
The current rises in inflation has many causes. Certainly, some of these are outside the direct control of British policy makers, not least increases in shipping and raw material costs as the international economy picked up after the first few COVID19 waves, and the knock-on impact of Putin’s war in Ukraine.
But there are homegrown factors as well.
The Bank of England has, quite frankly, been asleep at the wheel. I can’t think of many organisations that have so spectacularly failed to achieve their required targets where heads haven’t rolled as a consequence.
Bank governor, Andrew Bailey, and many on his monetary policy committee (MPC), not having experienced high inflation in their professional lifetimes, have implemented a zombie monetary policy, ignoring real world evidence and so have responded with too little, too late to slow down this initial inflationary wave.
They’ve had more than a decade since the 2007/08 financial crisis to restore interest rates to a minimal operational level by way of small, occasional increases of the order of 0.1%.
This would at least have given the Bank some financial ‘ammunition’ with which to respond to changing economic situations. As it is they now seem only capable of rising rates by 25 basis points – or not at all.
Even the governor now accepts that the most recent rate rises will not have an impact for another 18 months.
This ‘groupthink’ is a real weakness. Interestingly, most of the independent members of the MPC have been more proactive in voting for early rate rises – only to be outvoted by Bank insiders.
I also believe that the Bank needs to have a more nuanced role in correcting market imperfections. So rather than just focusing on headline data (and failing to intervene in a timely fashion), the Bank needs to monitor and influence asset prices such as that of land, which has far outstripped the former and is an impediment to business investment and growth.
More generally, policymakers need to address the disproportionate impact on inflation being felt by this county’s and country’s smaller businesses, who are essentially price-takers in the jargon, i.e. not big enough to negotiate price increases forced on them by bigger suppliers.
We must never forget that it is the smaller SMEs that provide most of the employment in this county, and that failing to consider their needs above those of ‘big business’ is not only an error but a great insult to that sector of our economy.
An analysis of the FTSE 350 shows profit margins for the largest listed companies were 73 per cent higher in 2021 than in 2019 before the pandemic.
Some commentators have calculated that these excessive corporate profits are responsible for nearly three-fifths of inflation in the last six months alone!
Through these policies, I remain hopeful that we can reduce inflation to manageable levels over the next two years. There will certainly need to be a careful balance struck between wage increase restraint and consumer confidence to tide us over during this time.
The Government can do its bit by reducing taxes on business, including VAT on fuel, the NI Employer contributions, and business rates, to ensure that firms can continue with their investment plans and help remunerate their staff fairly.
We need to imprison the thief that is inflation for all our sakes.
First published www.suffolkfreepress.co.uk
& www.dissexpress.co.uk on
Thursday, July 7, 2022
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