After decades of calm, inflation – that insidious, silent thief – is once again on the hunt in Britain and threatens to become the biggest comeback of the 1970s since Abba’s revival.
Worse, the specter of ‘stagflation’, rapidly rising prices coupled with low growth, is scaring markets. And no one is more in danger than Rishi Sunak.
The Chancellor is well aware that people are already feeling a lot poorer because of inflation. He also knows that we are affected just as the Tories are planning hefty tax hikes from April next year to help fund social care and the NHS.
In his speech at the Conservative conference yesterday, he defended the tax hikes and argued that it was immoral to continue piling up more debt for future generations. After the massive Covid support operation, the national debt is already more than £2 trillion.
And as Mr Sunak knows all too well, every percentage point increase in retail price inflation adds about £5bn to the government’s interest account.
But it’s not just the state that will be hit by inflation: the cruel effects on individual families are all too clearly demonstrated by exclusive research for the Daily Mail from the Center for Economics and Business Research (Cebr).
Using figures from the Office for National Statistics and assuming an average inflation rate of 4.3 per cent in the last three months of 2021, the survey found that an average family of four will have to spend over £1,800 extra on utilities. , clothing, leisure, transport and other costs this year compared to 2020.
The Chancellor is well aware that people are already feeling a lot poorer because of inflation. He also knows that we are affected just as the Tories are planning massive tax hikes from April next year to fund social care and the NHS.
Essential expenses, such as fuel and food, are on track to rise by more than £1,100. Transport alone is likely to cost nearly £500 more.
These are sobering numbers. But then it’s hard to overstate the blatant effects of inflation, which impoverishes the thrifty, destroys the dreams of entrepreneurs and tears the fabric of society.
When inflation starts to pick up, household budgeting, which should be little more than a humdrum chore, can become a frenetic battle as retail prices soar.
The cruellest consequences could be for retirees and others on modest fixed incomes — those who can’t negotiate a pay rise to offset rising costs.
According to our Cebr research, a retired couple will see their living expenses rise by more than £1,100 this year compared to last year, with an increase of nearly £670 on their essential bills alone.
Inflation punishes the prudent, many of them elderly, by destroying the value of hard-earned savings.
For example, if you put £10,000 in an Isa cash savings account with a typical interest rate of 0.3 percent, and the inflation rate is 4 percent, you would lose about £360 from your nest egg over the course of a year.
And low-income people will have a hard time.
Customers search for supplies in an empty London market due to a truck drivers’ strike, on January 12, 1979, in London, during a series of general strikes and demonstrations called the Winter of Discontent
A couple with just over £13,000 will see their annual expenses rise by nearly £900, with more than £600 increase in unavoidable costs, according to the Cebr analysis.
In other words, as the research center’s economist Kay Neufeld points out, we’ll all have to pay hundreds of pounds more to consume the same thing we did a year ago.
That’s depressing for everyone, and very hard on those people who are already counting every penny.
It is true that the Bank of England has insisted that the recent upward trend is just a passing phase as we get out of the lockdown, which will calm down on its own.
But there’s no guarantee that this soothing scenario will happen, and plenty of reason to be scared.
The most important measure, the Consumer Price Index (CPI), has already risen in August from 2 percent in July to 3.2 percent in August. That is the highest increase since the start of this measure in 1997.
The Bank now admits that it could reach 4 percent by the end of the year, which is double the official target of 2 percent.
Unless prices are brought under control, it means only one thing: higher interest rates. While a rise in borrowing costs has always been looming as we recover from the pandemic, there is a world of difference between raising interest rates in a strong economy, when people are feeling better off, and being forced into a time of weakness .
It would tighten the thumbscrews for legions of homebuyers who have taken out large loans based on ultra-cheap mortgage deals.
With household budgets coming under pressure, it will be more difficult for Rishi Sunak to implement further tax hikes, regardless of the size of the national debt.
Indeed, households already receive a double blow in the spring.
In addition to the 1.25 percent increase in National Insurance for health and social care, there is also a sneaky tax increase in Sunak’s March budget that has been all but forgotten.
He froze personal tax deductions from April for five years, instead of increasing them with inflation.
This creates ‘tax impediment’ by drawing more people into the tax grid – and the higher inflation, the harder that tax freeze will bite.
All of this will come as an unwelcome novelty to generations of Britons who are fortunate enough to have lived through an era where they have been able to take low and stable inflation for granted.
British Leyland workers from the Longbridge factory demonstrate on February 7, 1979, in Cofton Park, south of Birmingham, during the Winter of Discontent
Only those well into their sixties have experienced the nightmare year of 1975 as adults, when inflation rose to 25 percent. The rest of us are too young to remember. Rishi Sunak was born only five years later.
Then why has inflation awakened from a long sleep?
The UK economy, like others around the world, is recovering from the pandemic, but in an uneven way.
Many people have accumulated large savings during the lockdown and are eager to spend, so the demand is high.
But at the same time, there are supply problems. Wholesale energy prices have skyrocketed. There is a widespread shortage of skilled workers, including truck drivers, which has led to panic buying at the gas pumps.
A businessman on the cutting edge contacted me to say that his bed linen business, like many others, is plagued by runaway costs, including an eightfold increase in container shipping costs.
‘A 40ft container now costs more than £20,000, compared to £2,500 last year,’ he says. ‘The value of cotton has increased by 40 percent, while the amount actually available has decreased.
“If a retailer passed these extra costs on to consumers, many textile products, such as upholstery and clothing, would more than double in cost.”
The concern is that raising interest rates may not be as effective against current inflation.
Tariff increases act as a brake on spending and therefore depress demand. But that won’t help get more truck drivers on the road, or ease congestion in shipping ports.
One of the reasons inflation was so low until the pandemic hit is “globalization,” which economists call the smooth movement of goods and services around the world.
This helped companies become efficient and keep prices low as they could rely on cheap and ultra-fast global supply chains. But the globalized, ‘just-in-time’ model is under pressure from Covid and Brexit.
Businesses are battling rising material prices, from concrete and bricks to drywall, plus rising energy and shipping costs.
According to the OECD (the Organization for Economic Co-operation and Development), commodity prices were about 55 percent higher in July and August this year than a year earlier.
Unsurprisingly, against this backdrop, UK manufacturers are being forced to push through massive price increases, which in turn trickle down to consumers. Wages are a major factor in runaway inflation. When workers demand hefty wage increases, it can set off an inflationary spiral, as in the 1970s, when unions used their power to hold companies to pay ransom.
This time, in a strange irony, it is Tory politicians who are demanding wage increases for workers, hoping to solve the labor shortages after Covid and Brexit.
As desirable as it is for the country to create a highly skilled and well-paid workforce, in the short term, wage increases are likely to drive inflation up.
These are extremely anxious times for Andrew Bailey, Governor of the Bank of England.
One of its main tasks is to keep inflation under control. Failure to do so will likely jeopardize the independence of the Bank of England, which in turn increases the chances of politicians setting interest rates. Perhaps some government figures would welcome such powers, but what if a mad Labor chancellor were given the keys to number 11?
Taming inflation is easier said than done. To borrow from the famous economist Friedrich von Hayek, it is like taking a tiger by the tail: only to try with the utmost skill and caution.
We are a long way from the horror of Britain in the 1970s.
For now, there is still a chance to prevent the tiger from loosening its vicious claws. We must grab it while we still can.