The wrong type of inflation

24th July 2022

The Thick Of It appears to have lacked the imagination to include many of the ridiculous things that are happening in our politics. They would have been described as too far-fetched to be plausible.

I am sure that I am not alone in looking at the current issues in our country a mixture of disbelief, amusement and often despair. The Thick Of It appears to have lacked the imagination to include many of the ridiculous things that are happening in our politics. They would have been described as too far-fetched to be plausible.

We are now left with two candidates for the leadership of the Conservative party and for the time being Prime Minister. I wonder how two holders of high office can spend any time telling us that they will reset the Government policy, when they have both been in positions of relative power. They have been supporting the Government mandate and now they are saying that policy has been run so badly.

Similarly, the term of Boris Johnson from 2019 seemed to distance itself from the previous four years of Conservative rule or nine years, if the coalition with the LibDems is counted.  Also, the Conservative back-bench MPs have been referring to the Government as if it were a separate party. 

Those are my principles, and if you don’t like them……well, I have others. Groucho Marx

We are certainly in the post-truth era. So, much misinformation and then denial. Unfortunately, for people in the public eye, we live in an age when everything is recorded.  So, when challenged and the person is denying what they said, it is easy to provide photographic movie and sound evidence of what they previously said. 

Obviously, nobody works on the principle “if you always tell the truth, you do not need to remember what you said.”

As a leader, Boris Johnson has had unprecedented issues to deal with – Brexit, Coronavirus, war in Ukraine, financial hardship, strikes and global warming.

  • He got Brexit done – actually, no. He pressed the starting button.
    • The Northern Ireland Protocol is a mess. Government willing to break international law to get round some of the problems.
    • Many importers and exporters have struggled with paperwork to do business.
    • Travel abroad is chaotic.
    • Immigration has not stopped – illegal immigrants tend not be European anyway, but somehow the issues are conflated
    • Many foreign people have left the country or are not allowed in to do jobs that are no longer being done without them – causing problems for the health and care services, hospitality, farming, fishing and harvesting industries.
  • He guided us through coronavirus – yes and no.
    • The UK was first to approve a vaccine and was early in getting a lot of the population vaccinated.
    • Lockdowns were too late and cost lives.
    • International travel was not blocked very well.
    • The UK has had around !80,000 deaths, which is quite high in the world lists.
    • Partygate was a farce that caused a lot of grief. In fact, they may not have actually been parties, but they were gatherings that were illegal.
    • Coronavirus is still a problem although it is not reported openly.
  • He has led Europe to defend Ukraine against the invasion of Russia
    • Maybe, but it seems to have been more of a photo opportunity than offering real assistance.
    • We are providing training for Ukrainian soldiers and have sent defensive weapons. But we are not made aware of what the rest of Europe is providing.
  • The strikes have been described as Labour’s strikes.
    • This is a fallacy as the RMT union is not affiliated to the Labour.
    • There have been accusations that the Government Minister for Transport has not participated in any of the negotiations, despite being one of the ultimate decision-makers.
  • Global Warming
    • Recent weather with record temperatures and wildfires.
    • Both candidates talking about reducing Green Levy as it costs too much.
    • Carbon Zero by 2050 seems to be a lower priority than it should be.

I am not sure that either of our prospective leaders fill me with confidence.

The foreign deals that we have arranged with Japan, Australia and New Zealand have been trumpeted as success. However, we have seen that the deals are unlikely to be good news for our farmers.

As we try to plan towards Carbon Zero by 2050, it seems strange to strike relatively small deals with countries on the other side of the world, when we have the world’s largest trading bloc so close to our shores.

It has been argued that are current economic problems have been building up for some time. Certainly, long before the Ukraine war that has been blamed for fuel prices and other price increases.

Also, it has been suggested that coronavirus and the Ukraine war have been excellent diversions to hide the effects that Brexit is having. These problems were foreseen by the “Remoaners” and written off as “Project Fear”. But it is difficult to see beyond the numbers that suggest the project fear is now project here as the foreseen problems have materialised.     

So, we now have the two candidates talking about taxation and interest rates. What I can see could only be described as economic illiteracy. Both candidates have worked in the Treasury, so my expectation would be for more understanding of how to deal with economic problems.

Raising tax actually does not significantly increase the income received by the Treasury. Many of the people paying the highest taxes employ people to minimise what they pay. The higher the rate of tax, the more economical it becomes to employ the clever people to minimise the tax paid.

For some multi-national companies, if our tax rates go up, they will find an alternative jurisdiction to pay lower rates of tax. Therefore, ironically a lower rate of tax would mean that those companies would choose to pay in the UK rather than elsewhere. 

Large companies do generate a lot of tax payments because they employ many people and therefore income tax and national insurance is generated.

To achieve good outcomes for vulnerable customers, firms should take action to:
• understand the needs of their target market/customer base
• make sure staff have the right skills and capability to recognise and respond to the needs of vulnerable customers
• respond to customer needs throughout product design, flexible customer service provision and communications
• monitor and assess whether they are meeting and responding to the needs of customers with characteristics of vulnerability, and make improvements where this is not happening

I can’t believe it’s not better.

The cost-of-living crisis has been building for a while. Wages of many people have been suppressed for some years. The use of food banks, even for working people has risen to appalling levels.

The cost-of-living crisis was building long before the war in Ukraine.  The cost of energy has been accelerated by trying to move away from Russian gas. Also, many people would not have known how reliant the world has been on grain and other commodities produced in Ukraine.

Whilst we clapped for the NHS and other essential workers during the lockdowns, I am sure that they would have felt far more appreciated with substantial pay rises that they deserve.

These pay rises are described as possibly inflationary. This effect would be relatively minor. Their buying ability would only be used on basic necessities.

To increase interest rates to stop this inflationary pressure is actually addressing the wrong type of inflation.

Demand-pull inflation is the upward pressure on prices that follows a shortage in supply where too much money is chasing too few goods.

This would be where a lot of people have money to spend and their consumption is driving up prices. An example of this is the price of holiday deals during the peak time of school holidays.

Increasing interest rates means that spending power is reduced as people are spending more of their money servicing debts. This works in a demand-pull inflation environment.

What we have in the country at the moment is cost-push inflation.

Cost-push inflation occurs when overall prices rise (inflation) due to increases in production costs such as wages and raw materials.

So, increasing interest rates at this time will actually compound the problems for most households. They are struggling to pay their bills and the cost of borrowing increases leaving them with even less spendable money.

I am horrified that it seems that none of the people giving advice to the decision-makers have applied this simple economic theory. Perhaps it is a long-time since they sat their GCSEs.

So, we are currently living in a country that to the outside world must appear to be a bin-fire.  Our current reputation on the world stage has been diminished due to our poor negotiation skills over Brexit, followed by the willingness to break international treaties and the law.

Domestically, we have

  • Low wages for too many people.
  • High inflation.
  • Increasing interest rates
  • Civil unrest – strikes
  • Increasing use of food banks.
  • Shortages of some products and foodstuffs.
  • Coronavirus has not gone away.
  • Possibly problem developing with monkeypox.
  • Ongoing crisis in the NHS.
  • Global warming needs urgent action
  • Two lightweight candidates for the Conservative Leadership and short-term Prime Minister.

This list is not exhaustive.

I can’t believe it’s not better.