The nice people at Tortoise invited me on to chat about ‘the prospects for inflation’ this week. Pulling together the research and chatting to Hodge Hill residents on Facebook and outside Aldi on Friday, three thoughts struck me.
1. This isn’t biting the government – yet. But inflation is already hurting the poorest.
Right now, voters sense that as we come out of lockdown and those that saved now spend and workers come off furlough, there’s likely to be more money swilling around the marketplace. So they expect prices to rise. But the poorest are already feeling the sharp cut of rising prices. Especially those on Universal Credit who have just lost £1k a year as the £20 uplift is withdrawn, or for example, carers.
I’ve generally found primary school heads are amongst the first to pick up changing social trends – and my local heads are telling me they’re already seeing parents under more financial pressure and kids in more hardship. Already.
2. Inflation risks may well be higher in Britain thanks to our broken competition system, bodged Brexit – and shambolic industrial strategy.
Economists are pretty divided about the outlook for inflation. There are some obvious causes; soaring energy prices, rising food prices and terrible disruption to supply chains.
As they teach you in the Business School favourite ‘beer game’, any supply chain can quickly get jammed when inventories are run down and then demand jumps. And there’s a tonne of pent-up demand from savers to fuel that demand right now. The excellent House of Commons library notes
the household savings ratio (household savings as a proportion of household disposable income) increased from 8.9% in January-March 2020 to 25.9% in April-July 2020, a record high since the series began in 1987.
So, it’s perhaps no surprise that retail sales and consumer confidence is up.
Add to this the pressure of soaring energy prices and a tight labour market, and it’s no surprise inflation has spiked. Gas prices led the way; the capped price is reviewed twice a year and jumped by £139 at the last review in August 2021. That could get worse: some report it could rise by a further £400 at the next review in February 2022..
But Britain is especially vulnerable to this short term surge breaking the anchors of price expectations for the future. Once that happens, inflation takes off as workers rack up wage claims. As Sebastian Mallaby argues in Foreign Affairs, that presages the end game for ‘magic money’ support for the economy. Britain’s vulnerabilities are three fold:
A. Our broken competition regime leaves us very vulnerable to large dominant companies raising prices. I’ve written about this elsewhere but suffice to say, IMF analysis of ‘mark-ups’ in the British economy shows over the long run, price rises here are worse than than the global average. In their extraordinary study, the IMF found markups, which are a good proxy for rising market power of leading firms, rose 38% across advanced economies – but by 60% here in Britain. This suggests we’re more vulnerable to dominant firms with the power to jack up prices.
B. The bodging of Brexit means our traders – importers and exporters alike – are hopelessly tangled in red tape. In the West Midlands you don’t have to wander far to find stories of manufacturers forced to shut down the factory floor because of supply delays at the border. These delays add to costs.
C. Our terrible training systems mean it’s very hard to retrain workers quickly to fill new gaps. The hopeless centralised system of controlling grants from the Department of Education means local areas lack flexibility to move at speed to surge funding into new areas to retrain workers. So in Birmingham we have both high vacancies AND high levels of unemployment. A sure sign of a broken system. This means we’re more vulnerable to sharp wage rises in particular sectors.
3. The politics of this will arrive next spring – when pensioners face falling living standards
I suspect the politics of this won’t actually become acute until next Spring, when stubbornly high inflation may cut into the living standards of pensioners. Remember, the over 65s are the key to deciding who governs Britain. While Labour narrowly wins the working age vote, we lose the over 65s by 3 million.
Now, at the Budget the Tories broke their manifesto commitment of a triple lock on pension rises. Using September’s CPI figure, the Tories decided that in April 2022, the basic pension is set to rise by £4.25, from £137.60 per week to £141.85 per week. That’s a rise of 3.1%. However if inflation is as bad as the Bank of England forecasts, peaking at 5% next Spring then pensioners will see a cut in living standards. And for some who are more exposed to energy price hikes, that squeeze will be harder still.