Those ‘flashing the cash’ will not be enough to create inflation, whatever they like to think

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Of the many FT columnists Merryn Somerset Webb is one that irritates me. I would not be surprised if the feeling was mutual. She has a column this morning that is example of the reason.

As she notes, she is in Cornwall for half term. And as she also notes, prices are high. From this she extrapolates that we are heading for growth and inflation. And that, I suggest is a mistake for a lot of reasons.

I am not disputing the evidence. Surfing lessons for seven on a trendy beach may be £380 for an hour. And coffee and a croissant my be £7 each. Holiday home prices may also be going through the roof. But, and this is a massive but, this does not reflect normality, or a trend.

Prices are high because of short term pent up demand. Going on holiday has not been easy of late. Of course there was always going to be pressure on prices when places opened up again.

And as matter of fact, QE has pumped hundreds of billions into the economy. As I have sought to point out, many times, this has increased inequality. By far the biggest gainers from QE have been those already rich. The friends and holiday home rivals of Merryn Somerset Webb, in other words. They are the most likely to have excess cash right now. And as economist Torsen Veblen was keen to point out more than a century ago, there is nothing that those with spare cash like more than to flaunt it on excess, and very conspicuous, consumption. He could almost have predicted Somerset Webb’s article and its implicit bragging about her ability to pay the prices in question.

But, and gain it is a big but, that does not mean everywhere is like a smart Cornish holiday destination where the wealthy want to be seen to hang out. Nor (and I think this may be quite shocking for some at the FT) is everyone well off, and much more so as a result of coronavirus. Some have died. Many more are suffering substantial stress, and in many cases that stress is about household economics.

The best off may be very much better off now. They may be fuelling house price increases. They my cause some local inflation as they literally compete to flash their cash, which traders will be pleased to help them do. But they are not normal. In fact they are very far from it.

I have made this point before. Andy Haldane, soon to depart the Bank of England, has claimed the UK economy is a coiled economy waiting to spend. But that is because he has chosen to sample his friends. And given that his friends are all likely to be in secure employment and be in possession of some financial worth, he too made the mistake of extrapolating  his personal situation and then concluded the whole country is in the same position.

The reality is that the whole country is not in this position. Millions are still on furlough and most now be wondering what might happen in September as a new wave of Covid hits.

Millions more fear losing their jobs.

It is thought that around three million missed out on Covid support claims.

And many, mainly lower paid, workers did not benefit from working at home.

For all these people there is no Covid bonanza.

Nor, given the very strong likelihood of increasing unemployment is there any chance of a wage rise.

For all these people the struggle is to make ends meet. And any funds saved are going to be kept for a rainy day. That is what happened after 2008, and it lasted for years. There will be no ‘flashing the cash’. There might be a treat or two, but no more.

We live in a deeply divided country. There is a risk of short term demand led inflation created by a few. But sustained inflation requires that wages rise in response to price pressure. Without organised labour there is no mechanism to deliver that. It is not going to happen as a result. The reality is that, just like in 2011 and 2012, inflation will make people worse off, but will not result in wage adjustment.

So, is Merryn Somerset Webb’s extrapolation of her holiday experience in any way realistic? Yes, when it comes to holiday home prices. These are a good indicator of divided Britain. Otherwise, I suggest not. There are no real signs of sustained inflation in the UK economy, although there are enough people wanting to flash the cash in front of their fickle friends and acquaintances to persuade some otherwise. But that says more about their own desire to conspicuously consume than anything else.