Inflation

The inflation trap

philmullan Economic policy, Inflation, Productivity, Zombie economy

Governments and central banks across most advanced economies are battling to put a lid on consumer price inflation. When at the beginning of the year, UK prime minister Rishi Sunak outlined his five key priorities – halving inflation was at the top. With UK inflation still far above the Bank of England’s two per cent target, its Monetary Policy Committee (MPC) once again decided last week to increase short-term interest rates by a further quarter of a per cent.

The focus on tackling inflation makes sense on the surface. After all, high consumer inflation – say, above five per cent per year – is always a problem for people struggling to pay their bills. However, whatever the immediate trigger, higher inflation is invariably a symptom of deeper problems in the economy and in society. A narrow focus on inflation levels can be a distraction from the real cause of people’s hardships – namely, protracted and anaemic growth in the UK and much of the rest of the West.

The key factor behind today’s economic problems is the post-2008 productivity slump. This was the cause of the wage stagnation during the 2010s. It also underlies the economic fragility that has made it much harder for Britain to cope with the supply disruptions of the past three years, caused first by the pandemic lockdowns and then the war in Ukraine. Indeed, the lockdown-related interruptions to imported supplies were what initially set off the jump in consumer prices in Western countries.

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Britain has given up on growth

philmullan Economic growth, Economic policy, Inflation, Productivity

Many of us will have lost count of the number of ‘growth plans’ announced by the Conservatives over the past decade or so, but one thing is common to them all. They have made no difference whatsoever to Britain’s productivity slump. After 12 years of Conservative economic plans, strategies and frameworks, private-sector productivity is only five per cent higher than it was when the Tories took office. Come rain or shine, pandemic or no pandemic, in the EU or out of it, with low business taxes or high businesses taxes, productivity has barely budged at all.

Despite the failure of all the previous plans to revive productivity growth, probably none was as insubstantial as chancellor Jeremy Hunt’s last week. The absence of policy content was remarkable.

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Brexit is not to blame for our economic woes

philmullan Brexit, Economic policy, Inflation, Productivity

There is little doubt that the British economy is in a worse state than most other advanced industrial economies. This calls for a nationwide debate over the causes and potential fixes for this productivity slump. But to say that it’s all Brexit’s fault is a specious thesis that has little to do with economics.

Moreover, the determination to blame Brexit for everything going wrong is letting the Tory government off the hook. Politicians used to blame the EU for their own inaction on economic policy. Now that Brexit gets the blame for Britain’s continuing economic woes, the failure of successive governments to pursue a programme for productivity growth can be downplayed.

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We are lurching from crisis to crisis

philmullan Creative destruction, Economic policy, Inflation, Productivity, The longest depression

The cost-of-living crisis is not just a question of increasing prices. The reason the current inflation can be considered such a crisis is that the UK has not been creating enough wealth for people to afford these higher prices. And while the recent dislocations and disruptions caused by the lockdown reopenings and the Russian invasion of Ukraine have had a huge impact on prices, the British government still seems incapable of acknowledging that things were not going well economically both before the war and before the pandemic.

Even when the current rapid pace of inflation eventually slows, many households will still be struggling to meet those higher prices of essentials like food and energy. And even if those particular costs began to subside, many people would continue to live on the edge, until the next shock sends them deeper into privation. These scenarios reveal that today’s cost-of-living crisis is not just a product of price increases.

Why have the increased costs become so unbearable for so many households? Why is there so little capacity at an individual, business or societal level to cope with these price spikes? Without addressing these historical issues underlying the current hardship, we are likely to see a continuation of crisis management rather than a durable fix.

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The cost-of-living crisis has been decades in the making

philmullan Debt, Inflation, Politics, Productivity, The longest depression

The soaring cost of living, aggravated now by the fallout from the war in Ukraine, is bringing dreadful difficulties and hardship for huge numbers of people. This is the latest in a long series of economic crises which successive governments have been unable to manage effectively. How can Britain stop stumbling from one crisis to the next? By escaping from the sustained underinvestment and rising borrowing that have left Britain trapped in the Long Depression and that have robbed governments of the slack they should have to help people get through such challenges.

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