With the right political will, inflation can be defeated

US Federal Reserve governor Jerome Powell: is inflation really transitory?

(Image credit: © Drew Angerer/Getty Images)

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.”

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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.

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