An economics lesson from my barber

My local barber re-opened this week and promptly put his prices up by 90% – from £11 to £21. Many on my local Facebook group are up in arms about it, but raising the issue on Twitter it seems many hairdressers and barbers across the country have done something similar. Prices have gone up – and quite substantially.

Those headed to barbers and hairdressers to get their hair cut for the first time since the lock down are getting a nasty shock when they come to pay the bill.

When future historians come to write the story of the great inflation of 2020, perhaps they’ll say it started at the hairdresser’s.

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Why put your prices up? Because you can

There are several stances you can take when looking at my local barber’s decision to put his prices up so substantially.

His business has been shut down for three months, so he needs to recoup some of the money he’s lost. Perhaps the extra cost justifies the fact that, with new safety requirements, he cannot get as many customers through his shop; he has to spend more time cleaning up and sanitising between customers – previously productive time is no longer productive.

Or you can take the view that demand for his services is so great, he’s entitled to put his prices up: there are more customers than he has time for. That’s the way markets work. Hairdressing is a badly-paid profession. The average annual salary is £15,610 – on a level with waiting and bar staff – so when a rare opportunity comes along to make some hay while the sun shines, good luck to him.

Others feel that he is, quite frankly, taking the mickey and exploiting the situation. There is truth to all of these arguments.

Maybe, as life starts to normalise – if life starts to normalise – and the current demand for his services subsides, he will lower his prices. But will we ever return to the pre-lockdown levels of £11? I doubt it very much.

On the other side of the exchange, different people are reacting differently to this new reality of £21 haircuts. Some are taking their custom elsewhere; others have watched 20-minute YouTube explainers on how to cut your hair and are “self-clipping”. Others are delaying haircuts; many are paying up and swallowing the price rises.

I see this episode as a manifestation of something we have been worrying and warning about at MoneyWeek for several months now: inflation.

Where will the printed money go this time?

Covid-19 – and the government intervention and money-printing that have followed – have created colossal economic distortion and dislocation.

Remember the money printing that followed 2008? It led to huge asset-price inflation. Financial assets – bonds, stocks, house prices in certain areas, collectibles – all rose dramatically in price. Wages (except in some sectors) mostly didn’t. Thus, some benefited while others didn’t. The result was more financial inequality, especially between generations. Something similar is happening now.

There are quite a few people out there who are feeling quite rich in this new Covid economy, especially those working for the government. They have carried on earning, either through temporary furlough or working from home. Perhaps they are retired and have been drawing pensions. For whatever reason, their income has not changed. Meanwhile, on the other side of the coin, they have not been spending anything – no restaurants, no going out, shopping only online.

Others, particularly business owners and the self-employed in the leisure industry, are boracic.

We don’t yet know the full story of how this economic distortion will play out. But one thing we have warned about is that, whereas in 2008 the funny money went into the financial sector, this time around it is going into the real economy. And so that is where the inflation would manifest.

My local barber putting his prices up by 90% is just one example of this. He is reacting to all the circumstances around him – the loss of earnings due to lockdown, the fact that he can’t get as many people through the shop, the fact that demand is so high. Yes, he probably is taking the mickey a bit too. But he has a living to earn like everyone else. He is not a charity.

It is all a symptom of unrestrained money printing and government intervention. I rather fear we are going to see many more such examples. If restaurants can’t get as many people through the door, for example, they too will have to put their prices up. Ditto theatres, sports arenas or gyms.

Some people will react by not going, others will pay up. It doesn’t matter. It’s all part of the inflation process.

We have mentioned Jens O. Parson’s book Dying of Money: Lessons of the Great German and American Inflations on these pages before. I am rather minded of this rather dramatic passage: “Scarcely a person … was untouched by inflation's handiwork. Every citizen, in his daily life and with his earthly fortune, danced to a tune he mostly could not hear, played for him by the government's inflation.

“It was up to every citizen to learn for himself what was happening and to look out for himself if anyone was going to, because no one else was looking out for him. The government certainly was not.”

I rather expect the eventual response to the inflation – assuming it gets worse – will be to try and manage it via taxation and price controls, rather than address the root cause which is printing money.

Understandably, I remain extremely bullish about gold.

Daylight Robbery – How Tax Shaped The Past And Will Change The Future is available at Amazon and all good bookstores with the audiobook, read by Dominic, on Audible and elsewhere.