Monday 26 June 2023

Infaltion: some thoughts, but few immdeiat solutions


Economists of my era divide the forces causing inflation into two: cost push pressures  and demand pull forces.  Both forces tend to be active at the same time.  Higher wages will tend both to  push prices up by increasing production costs a but also, if they are spent, will lead to increases in demand which, via shortages, pull prices up.

In our present situation it would seem that the predominant forces are cost push: higher energy prices, supply constraints and labour shortages resulting from Brexit, and possible “greedflation” – companies taking advantage of the general  climate to increase their  profits by raising their prices more than is necessary. That certainly seems to be happening in our local market.

Given that wages are rising much more slowly than prices it is hard to argue that inflation is predominantly “demand-pullful” as American economists express it.

 Yet the official response, by the Bank of England and fully supported by the government, is to raise interest rates.  This is the classic response to combat demand-pull inflation, taking demand out of the economy by raising borrowing rates and thus curbing investment and, more publicly evident,  by diverting what would otherwise go into consumer spending into the building societies or banks as repayments on mortgages. 

Just setting aside for the moment whether this is an appropriate response or not, is seems a bit daft to undermine its effect by generating all sorts of schemes to avoid the full effect of the higher repayments with extensions, payment holidays and interest-only alternatives.  It would have been more logical to raise the  interest rate by a quarter point rather than a half

Whilst we can all have sympathy for young people struggling to pay mortgages, they are not the poorest in society.  These could be helped by a cut in VAT. Increased social security, payments, at the very least the  restoration of the £20 should it now vbe £22?) addition to Universal Credit.  Given that the National Debt is now over 100% of GDP (the “respectable “ maximum is 60%) such a tax cut and increase in public expenditure would have to be paid for. An increase  in the top rate of income tax, excess profits taxes and windfall taxes, capital gains taxes on rising house values,  land taxes etc should all be considered.

Progressive parties will balk at these suggestions because they see them as electoral suicide, but unless we start to talk about them they will never become the practical solutions our economy needs.

 Inevitably the real solutions to our inflation problems are in the long run, and need to be introduced before we’re all dead: investment, in green technology rather than prestige projects such as HS2; improved infrastructure, particularly the northern rail network; re-integration with European markets; a greater measure of equality; effective and respected technical education; government support for the arts and universities; a more stable and effective political environment.

  These and the many others  will all take time.

A final word of warning.  It is easy to assume that when inflation does fall, prices will too.  But on post-war form they won’t.  Unless something very unusual happens, such as a depression as severe as in the 1930s, they will stay up at the new high level.  I was horrified to discover, in a walk through our local park yesterday, that a small cone with just one dollop of ice-cream on it costs £2.25. 

When ice-cream sales resumed after the war, when I was eight, a small cone from Mr Allott’s Dairy  in our urban village cost 2d  (less than 1p in modern currency.)   Now 225 times dearer.  Oops.


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