Inflation is really not a monster about to rear its head

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Andy Haldane, soon to be the ex-Cheif Economist of the Bank of England, has an article in the New Statesman this week claiming that all the conditions are right for continuing inflationary pressure in the UK. His claim is that:

[T]here are plenty of reasons why that benign inflation scenario may not materialise. The momentum in demand may prove persistent rather than one-off. Bottlenecks in supply may prove sustained rather than fleeting. Pricing power among companies, and bargaining power among workers, may be bolstered by resurgent demand rather than remaining low. While nothing is assured, I believe the evidence on each is mounting in one direction.

He suggests, in particular, that disruption in supply chains will push prices up. But he adds his familiar theme that there is a wall of savings to be spent by business and individuals alike and that they are determined to spend it.

Evidence of the past does not support this. After 2008 spending took a long time to recover: savings was the theme. These are the historic sectoral balances from the March 2021 budget documents:

The lines show who is borrowing (below the X-axis) and saving (above the X-axis). Companies saved post 2008, and households took a long time to reduce their savings to pre-crisis levels -about eight years, in fact.

Haldane says that this time it is different:

Although it is early days, sentiment among businesses and consumers has already shifted decisively, with company and household confidence climbing to above pre-Covid levels. Psychologically, although obviously not true for all, most people seem keen to make up for the lives they have not been living for the past 15 months, with huge pent-up demand for holidays, hospitality and other types of social spending.

I have said this before, and I will no doubt say it again, but I don't really believe this. I have no doubt it is true of Haldane's wealthy, well paid and very secure London friends. But the rest of the world is not like this. They are not nearly as optimistic as he thinks.

I take as an example work from the Institute for Fiscal Studies on the impact of Covid on potential pensions published earlier this week. They said:

  • The pandemic continued to depress the household incomes of some older people in late 2020. Over half of those who reported that their household income was lower than it was before the pandemic in June/July 2020 continued to report this in November/December 2020. In total 14% of respondents in November/December reported that their household income was lower than it was before the pandemic.
  • Those respondents who reported having lower household incomes in both June/July and November/December were more likely to be drawing on savings in order to weather that shock by the latter period.
  • 9% of respondents perceived that their financial wealth was now higher than it would have been in the absence of the pandemic. 20% reported that their financial wealth was lower.
  • Nearly a third of respondents reported that their retirement income in future would be lower as a result of the pandemic. Among those in paid work before the crisis this proportion was nearly one-half (45%).
  • The proportion expecting their retirement income to be lower is 11 percentage points greater among those who were managing less well financially before the crisis, increasing concerns about widening financial inequalities. 57% of those who were in work but managing less well before the pandemic expect their future retirement income to now be lower as a result of the crisis.

I think those worth reproducing because what they show is a significant hit on future prospects for many who are at the age when saving becomes a priority, and who often also have the most disposable income to spend on the types of consumption that Haldane thinks will lift the economy now. And for many of them the incentive looks to be to save, not least to cover the risk of further downturns.

Mentioning which, Haldane (who has turned boosterism into a trademark even more than Boris Johnson has) fails to note the impact of another Covid wave. Few now doubt this will happen. We do not know the impact. We do not know how severe the restrictions will be. But it is likely, based on past experience, that they will be more significant than anyone but me currently expects. And Haldane does not factor the damage that will do to confidence into his plans.

There will be more supply chain disruption, I am sure. There will be some pressure on prices. But if the vaccine boost is knocked - and I think it will be - all of Haldane's perceived confidence will vapourise. That is what I think is going to happen.

We may have some inflation this year. Some is no bad thing. But it will be short term. There is unlikely to be a spending boom. Labour is not going to be pushing up wage rates (maybe unfortunately) and business is not going to be rushing to invest: it is too debt-laden to do that. I think Haldane is way out with his forecasts. Time will tell.