Rising prices AND unemployment - how's about them apples
Britain is an ageing nation of rent seekers squeezing wealth out of the working population
Inflation is a bad thing. It robs savers and pensioners, rewards debtors, provokes industrial unrest and ruins the funding of public services like the NHS. However, recessions are a bad thing too. The Governor of the Bank of England says we are entering one of the longest recessions in history. Growth will be in decline until 2024.
Normally, recessions lead to deflation - to falling prices in the shops. That’s what has happened in every significant recession since 1870s. So why increase interest rates when prices are about to fall?
Well, partly this is about expectation management. The markets expected the highest interest rate hike in 30 years and if that hadn’t happened there might have been another run on the pound like after the Truss-Kwarteng mini- budget.
Yes I know: why do we make policy decisions on the whims of fly-by-night currency speculators? But that’s just the world we live in. Anyway,there’s another narrowly presentational reason for the Bank’s rate hike.
The Governor, Andrew Bailey, has been accused of failing to control inflation - with some justification since it is running about five times the 2% target in the Bank’s mandate. In 12 month’s time, as prices fall, Mr Bailey will be able to go to Parliament saying to MPs: look we took the tough decisions on interest rates in 2022 and see how well it worked.
But this is a delicate balancing act. It may be that the recession doesn’t actually kill inflation and that we experience stagflation: a recession and rising prices.
This happened in the 1970’s after the Yom Kippur war and the quadrupling of oil prices. Stagflation today is largely the result of the war in Ukraine. Vladimir Putin has been turning off the gas taps to Europe, causing an explosion of energy prices, and intermittently halting grain shipments boosting the global cost of food. There is no way that this kind of contingent inflation can be halted by increasing UK interest rates.
Then there is what the Bank itself calls “underlying inflation”. Price increases not directly related to the war in Ukraine are reckoned to be up to 6%. This inflation is largely a result of too much money chasing too few goods. Quantitative Easing has pumped £800 billion into the financial system since 2010 without generating economic activity to reconcile it.
Most of the money printed went into the pockets of relatively wealthy people who own property and shares. Anyone who has been living in a modest home in South East England has probably been earning more from capital gains on their house than from bothering to work.
This is a colossal redistribution of wealth to the have homes from the have nots. Many property owners also have investments in the stock market that have benefitted from asset price inflation.
Tackling asset inflation requires higher interest rates over a prolonged period and even though the Bank of England is supposedly independent, no Governor is prepared to countenance a house price crash. Politicians are terrified of values returning to rational levels because of likely headlines in the Daily Mail.
So where does that leave us? An ageing nation of rent seekers squeezing wealth out of the working population. And of course with that recession.
Higher interest rates mean higher mortgage payments leaving people with less to spend in the shops. Expensive money also extinguishes investment. In a credit squeeze, successful businesses cannot expand; less successful ones collapse altogether. This is why unemployment increases during a recession. The Bank expects it to double.
Britain has a sclerotic and ageing low growth economy based on inflated house prices instead of productive investment. And the Chancellor, JeremyHunt, is about to make that significantly worse by cutting public spending and increasing taxes in his next Budget statement. Good luck with that.