With the right political will, inflation can be defeated
Governments and central banks can easily control inflation, says Merryn Somerset Webb – they just need the will.
The latest numbers on UK inflation are out; the consumer price index is rising at 3.2% a year. That’s pretty nasty, but look to the US and you will see something nastier: there, prices are rising at 5.3%. We haven’t seen these kinds of numbers in the West for decades. You might think they aren’t much to worry about – the various economic distortions caused by the extraordinary policy response to Covid-19 were hardly going to just fade away, and the meeting of supply constraints with unlimited money printing was always going to have consequences – but it is perfectly reasonable to think they will work through the system and we will soon be back to our old mildly-disinflationary normal. This bout of inflation, our central bankers say, is “transitory.” Are they right?
The jury is obviously still out, but it is looking less transitory by the minute. In this week's magazine, Philip Pilkington argues that real long-term inflation is usually driven by labour shortages. We definitely have those: there are well over a million job vacancies in the UK. And it is no good trying to blame that on Brexit – there are labour shortages everywhere. In the US, there are ten million-plus job openings (many more than there are jobless people) – nearly four million more than pre-pandemic. Half of US small firms are hiring; of those, 60% say they can’t find qualified applicants. Around 50% are raising prices – presumably in part because they are having to raise wages to get staff. Explanations vary: school closures have forced parents to stay at home with kids; lifestyle preferences have changed; vaccination mandates have locked people out of career paths; and perhaps pandemic savings have allowed some to opt out of work or to retire early.
There is also, as Philip notes, fear: in the UK, 42% of people still say they are “very” or “somewhat” scared of catching Covid-19 (YouGov). How much might you have to pay someone scared to come to work, to come to work? How much might you have to pay someone who doesn’t want a vaccine to get one in order to work? And how much might you have to pay someone who has decided they are happy to forgo a lot of their pre-pandemic consumption habits in order to stay out of the labour market? Add this dynamic to ongoing supply disruption (it doesn’t seem to be working itself out in a hurry), and the fiscal stimulus still being offered by governments, and if I were forced to choose a word for today’s inflation, I might ditch “transitory” for “persistent.”
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The good news is that governments and central banks can easily control inflation: they can pull back from creating endless demand via vast public spending programmes financed by binge money-printing and they can raise interest rates. Inflation is then mostly a function of their policy decisions (or lack of). The bad news is that those decisions are really hard to make. Who wants to be the one who reneges on “build back better” promises, or who drives businesses into bankruptcy and homeowners into default with sharp rate rises? You need brave governments with eyes to the long-term greater good for that, and I’m not sure we have those.
This matters. According to the Financial Conduct Authority, 8.6 million people have more than £10,000 in cash savings. With interest rates stuck close to zero and inflation over 3%, those cash pots lose value every day – and are likely to continue to do so. They need protecting. How? Some of the answers are in this week's magazine.
Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).
After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times
Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.
Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.
-
Top 10 most affordable places for first time buyers
Looking to get onto the property ladder? We reveal the top 10 most affordable places in the UK to buy a house
By Oojal Dhanjal Published
-
Whatsapp scams - how to protect yourself
WhatsApp scams are on the rise and victims could lose thousands to fraud. We look at the most common scams and how to protect yourself
By Vaishali Varu Published
-
Should your business invest in a VoIP phone service?
Here's what you need to know about VOIP (voice over IP) services before landlines go digital in 2025.
By David Prosser Published
-
The end of China’s boom
Like the US, China too got fat on fake money. Now, China's doom is not far away.
By Bill Bonner Published
-
What is the future of Royal Mail in the UK?
With fewer of us sending letters and parcels, the Royal Mail is finding dealing with the nation’s post is an increasingly unprofitable and costly business.
By Simon Wilson Published
-
What's the secret of Manolo Blahnik's success?
Fashion maestro Manolo Blahnik shows little sign of slowing down at 81, and his company notched up a record financial year in 2022. What is the secret of his success?
By Jane Lewis Published
-
Michelle Mone's "tough year of pain"
Michelle Mone liked to portray herself as a working-class heroine who worked her way to the top through grit and determination. But her pedestal is built on sand.
By Jane Lewis Published
-
Trevor Milton, the Elon Musk wannabe, is jailed for fraud
The former CEO of Nikola, Trevor Milton, has been found guilty of lying about the development of the company's electric trucks.
By Jane Lewis Published
-
Directors should think twice before waiving limited liability
Should small-business directors ever provide a personal guarantee in return for bank finance?
By David Prosser Published
-
Why Russia's economy is doing better than predicted
Sanctions were supposed to strangle Russia’s economy, but it seems to be thriving. What’s going on?
By Simon Wilson Published