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20 May 2022

The UK is sleepwalking into recession

Tory MPs are berating the Bank of England to distract from Brexit and other economic calamities.

By David Blanchflower

The cost-of living crisis continues to worsen with no end in sight. The Chancellor, Rishi Sunak, decided now was a good time to raise National Insurance, cut benefits and increase the cost of energy even after the discovery of his wife’s “non-dom” status and his receipt of a fixed-penalty notice for breaking lockdown rules. 

All of this as the cost of Brexit becomes ever more apparent. I am still waiting to see any economic benefit; the only issue is how great the cost will be. For the UK, being outside a free-trade area looking in is a very bad place to be. 

A good illustration is the government’s ongoing threat to tear up the Northern Ireland protocol. Earlier this week the Office for National Statistics (ONS) announced that the lowest unemployment rate in the UK was, you guessed it, in Northern Ireland, at 2.3 per cent, compared to 4.6 per cent in the West Midlands, 4.7 per cent in London and 5.0 per cent in the north-east. 

This would be a dreadful time to start a trade war with the EU, which would further raise prices. The biggest loser would inevitably be Northern Ireland, which voted by a clear majority for pro-protocol parties at the recent election and has benefited greatly from its Brexit opt-outs. So much for the will of the people.

Then, of course, supply-side bottlenecks, rising oil prices and war on the European continent have raised commodity prices. Ukraine is a major exporter of wheat and the blockade of Odesa has increased the risk of global famines. Global wheat prices have surged by around 60 per cent since the Russian invasion in February.

All of this led to the disastrous ONS data release on Wednesday showing that Consumer Price Index (CPI) inflation, which the Bank of England is supposed to keep at 2 per cent, had risen to 9 per cent, the highest it has been since the series started in 1997 (first published as the Harmonised Index of Consumer Prices). Retail Price Index (RPI) inflation, which the Monetary Policy Committee (MPC) used to have to track until 2003, rose to 11.1 per cent in April, the highest rate since February 1982. The main driver was energy.

Memories of the period from 1974 to 1982, when RPI averaged 14.7 per cent, come flooding back. The danger, some say, is that there will be another wage-price spiral but this shows little understanding of the world we live in. The first thing to note is that, in real terms, regular pay rises are running well behind inflation and are down 3 per cent on the year. In March, the most recent month for which we have data, there was a jump in bonuses but these are one-off payments that will not impact inflation in a year’s time (unlike pay rises). Employers are using bonuses to solve short-term problems they are facing now as a result of the pandemic and the supply-chain crisis. 

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[See also: Five ways the government failed to shield the UK from inflation]

The second point to note is the weakness of the trade unions, with workers more worried about losing their jobs. In the 1970s, union membership rose across the world following the Paris riots of 1968. In the UK the number of trade union members rose by three million from 1969 to 1978, reaching a peak of 13.2 million. Today there are 6.7 million of whom only 2.6 million are in the private sector. With unions so much smaller and weaker, there won’t be a wage explosion. 

The totally out-of-touch governor of the Bank of England, Andrew Bailey, who is paid over half a million quid a year, repeated his ill-judged suggestion that workers should not ask for pay raises. This is not a surprise given it’s clear he is not representing the interests of ordinary people.

For several decades, firms have had the ability to pay workers more and have simply chosen not to. Instead, profits were channelled into exorbitant salaries for executives and dividends for shareholders. It is time for capital to pay up rather than, once again, trying to make the woman on the Mile End Road omnibus, who is already struggling to pay the bus fare, even poorer. 

In any case, it does seem that we are close to inflation’s peak. The cost of timber has fallen by a quarter in the last week. Drewry’s World Container Index decreased by 0.9 per cent this week to $7657.20, per 40ft container, down from $10,377 in September 2021 and $9,477 at the end of February 2022. Collapsing prices are what we would expect to see as people cut back their spending on goods. In the UK, YouGov/Cebr’s consumer confidence index has just hit a record low. When people stop spending there is a recession.

So, what is going to happen to inflation? The Bank of England’s dataset “A millennium of macroeconomic data”, as represented in the chart below, has the longest time series ever – it shows inflation in the UK for 810 years since 1210. What it shows is that the great danger when inflation spikes above 10 per cent is that it is followed by a period of deflation – falling prices. The chances are, then, that inflation will soon peak and then plummet as it has done in previous centuries. 

The MPC has made the economic situation much worse by raising rates four times since September and suggesting that it will raise them again, even though it agreed this would create a recession. And then there were all the Conservative MPs and cabinet ministers suggesting that the MPC should be doing something about inflation without taking the trouble to say what. No wonder, as they would have had to argue for more rate rises that would make the coming recession even worse and would destroy the Tories politically. Turkeys generally don’t vote for Christmas. 

The Conservatives don’t want to blame the obvious culprit – Brexit – but inflation and the Bank of England is a way of changing the subject from partygate and other scandals. In the end there will have to be a windfall tax on the energy companies, more help for the poor to pay their heating bills and tax cuts to stimulate the economy. And soon enough the MPC will have to cut rates.

[See also: Five ways the government failed to shield the UK from inflation]

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