The great hulking beast of inflation is growling again – setting the poor against the rich, and the young against the old, writes HAMISH MCRAE
It’s going to be a tough winter for most of us. The shortage of hauliers is leading to empty shelves and panic buying. The less well-off are about to lose £20 a week as the Government reverts to pre-Covid levels of benefit payments.
And there are National Insurance and tax rises in the pipeline next year to fund care homes and hospitals, hitting hard-pressed businesses and ordinary families alike.
But it is the great hulking beast of inflation that threatens the greatest harm of all. It is growling once again, and will growl louder in the months to come.
Wherever you look – restaurant meals, haircuts, filling up the car, heating your home – prices are shooting up.
John Allan, the chairman of Tesco, has told us to expect food to be 5 per cent more expensive this Christmas. Make no mistake, this is all too real.
The consumer price index is up 3.2 per cent on a year ago, well above the 2 per cent target set by the Bank of England, which now expects to see inflation at more than 4 per cent this autumn.
Covid-19 has pushed up the costs for making and moving around goods and for delivering services. Those extra costs are now feeding through to prices
If you prefer the traditional retail price index, which is still used for some pay deals, student loans and rail prices, that’s already up 4.8 per cent, the highest it has been for nearly ten years.
If it reaches 6 per cent, which is plausible, it would be the highest level since the 1990s, when it reached 10.9 per cent. No wonder there is talk of a Winter of Discontent. Memories of the roaring inflation we saw in the 1970s – it reached a peak of 26.9 per cent in August 1975 – remain strong.
I don’t think we will go back to that level, but we are clearly heading into a danger zone.
Inflation is socially destructive. The wealthy can usually cope. But the poor – particularly those on a fixed income – get hammered.
If prices rise by 5 per cent a year and you get, say, 0.5 per cent interest on your £100 of savings in a bank, £4.50 of your money is in effect being stolen.
And it is not only Britain which is suffering.
American consumer inflation is now at 5.4 per cent, house prices are up 16.5 per cent year-on-year, and the Dow Jones share index is up by 30 per cent. Inflation in Germany is at 3.9 per cent, the highest for 25 years. House prices there are up by more than 10 per cent and the DAX, the main German share index, is up 24 per cent.
These global price rises are partly a result of the pandemic and the disruption it caused.
Covid-19 has pushed up the costs for making and moving around goods and for delivering services. Those extra costs are now feeding through to prices.
We all know about the HGV driver shortage in the UK, and some people want to blame Brexit. But there is a shortage of drivers on the continent, too. Germany is short of between 45,000 and 60,000 HGV drivers. The United States is short of a similar number.
It is no surprise that wages are rising. Yesterday it was reported that lorry drivers were being offered £75,000 a year and fruitpickers the equivalent of £62,000 a year.
This pushes up costs, which in turn feeds through to prices. Meanwhile, the cost of shipping a container from China to Europe has quadrupled.
The world will eventually have a more robust economy – but to pay for it, we might have to sacrifice some of the things we have grown used to, such as an abundance of choice and rapid delivery
Costs for British manufacturers and producers, including the prices they must pay for raw materials, are up 11 per cent on the year.
And then there’s the surge in global gas prices that is causing so much chaos.
In time, the disruption will end and inflation will fall back. But it might well not fall back to the 2 per cent that central banks are comfortable with.
Forces that held global prices down, including cheaper labour in China, are weakening. China’s workforce is shrinking.
There is an important lesson here: the great global drive to cut costs has been shown to carry dangers. The pandemic has exposed this, and brutally so.
It might have seemed sensible to permit a world economy to develop in which the West stopped making many industrial products because it could get them cheaper from China or Taiwan. We now know differently.
For example, we need better means of storing gas supplies so the lights stay on when the wind stops blowing. Building this type of resilience costs money.
The world will eventually have a more robust economy – but to pay for it, we might have to sacrifice some of the things we have grown used to, such as an abundance of choice and rapid delivery.
It is no surprise that wages are rising. Yesterday it was reported that lorry drivers were being offered £75,000 a year and fruitpickers the equivalent of £62,000 a year
Covid is not the only cause of the price rises we are seeing.
There is another kind of inflation that is equally insidious: asset inflation. We have that, too. And it is already doing serious damage to parts of the economy.
Ever since the worldwide financial crash of 2008, the central banks have been holding down interest rates and printing enormous extra amounts of money. While necessary at the time to keep the economy stable, all that money had to go somewhere. And the result has been to push up the prices of assets such as property and shares.
House prices were up by 8 per cent in the year to July, after a rise of more than 13 per cent in the year to June.
Look at other assets: the FTSE 100 share index of large companies is up 20 per cent on the past 12 months, and the FTSE 250 index of medium-sized enterprises is up 40 per cent. Bitcoin, the cryptocurrency, is up nearly 300 per cent on its level of last September. By printing such vast amounts of money, we have created a world in which the rich, who hold assets, become still richer.
Yet for everyone else, life is progressively more difficult. Simply saving enough to build up a modicum of wealth is getting ever harder – as anyone trying to buy their first home will testify. This is enormously damaging, not just to the efficiency of the economy, but to our social fabric and our democracy.
The present notion that central banks should flood the world with cheap money without any consequences will seem absurd in a few years. Mortgage rates of less than 1 per cent will seem as odd as the 17 per cent rate of the 1980s seems now.
In recent days we have been getting hints from both the US Federal Reserve in America and the Bank of England that they will start to restrict the supply of new money in the economy. When they do, it will blow some froth off the speculative boom. That much would be welcome. But it is not enough.
We must create a pathway for all people to build wealth – not just for those who get lucky because they happen to own property or some other asset that’s shot up in value.
Our politicians and bankers have difficult choices ahead. I do not envy them.
If, as I expect, inflation will settle at 3, 4 or 5 per cent, the central banks will have to put up interest rates. There really are no other effective weapons.
Yet the bankers will be cautious. Despite the dangers of inflation, they dare not go too far. If interest rates are too high, the cost of servicing government debt – a cost that is already climbing in the UK – will be uncontrollable.
And it makes no sense to precipitate a housing crash here, in the US, or anywhere by raising the cost of borrowing to unaffordable levels.
The bottom line? We’ll be stuck with stubborn inflation for some time yet.
Yes, we must claw our way out of this jam – but without causing yet more damage and social division.
That means, for example, getting back to a position where young people can earn enough, and save enough, to buy themselves a home.
Inflating the price of assets has set the poor against the rich and the young against the old. It is both pernicious and unsustainable.
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