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.
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I agree with your view on inflation. Andy Haldane says “evidence is mounting” but I don’t see it….. I DO see a state of disequilibrium where there is pent up demand in some places, supply bottlenecks in others etc. But I do not see any evidence that these will persist…. and they need to persist for there to be inflation.
What might change my mind? Wages – particularly wages in the gig economy. If these vulnerable workers are able to exert pricing power then it is possible that we see some modest inflation. But, I for one, would welcome that.
But even if Andy Haldane is correct he fails to consider the asymmetry of the outcomes. If he is right, Merryn Somerset Webb will be paying £7 for her croissant next year; if he is wrong, the cafe will close and the workers will be out of a job.
It always used to be said that economists have predicted 5 out of the last 2 recessions…. perhaps we could observe that Central Bankers have predicted 5 out or the last….. errrrr….. zero inflationary surges.
🙂
“What might change my mind? Wages”. I do not disagree with the thrust of your comment Mr Parry, nor with Richards article. However, there was a very interesting piece by John Harris in the Guardian on wage rises: https://www.theguardian.com/commentisfree/2021/jun/06/fall-in-workers-rise-in-wages-new-economic-era-pandemic-work
One view is – about time, many people have been under paid for a decade. This leaves an open question: impact on demand if what Harris has found is reflective of the overall economy.
Yes I think this is right, but what would falsify our theory?
How high would inflation need to rise, and for how long, for us to no longer consider it to be transitory?
In short, how would we know that we are wrong?
I presume you do know how inflation is calculated?
Well, I know how the ONS calculate it, but I accept that lots of other entities collect price inflation data and use it to claim price inflation is already raging in the investment complex (The Cantillon Effect?) but I understand we don’t count that as inflation.
But really I’m just wondering how high the CPI would need to get and for how long it would need to stay there for us to know we have made a mistake by calling it transitory.
You obviously do not know how the way inflation is calculated
It is true that supply chain disruption is putting up prices – my line of work in housing development can attest to the fact that bricklaying has gone up in price and there is a chronic shortage of cement and fence posts at the moment. Pricing is shoving people out of the market – if you have an £8 million per year contract with a supplier, you can guarantee that someone else has a £30 million a year contract with the same supplier and who do you think gets precedence? Suppliers are having to ration out raw materials to try to make sure everyone gets something. It’s rough out there.
But just ‘cos prices go up, doesn’t mean that things are happening any quicker! Speed is another indicator of inflation. Everything is really slow, and identifying new supply chains is a major headache. Added to that is uncertainty.
Haldane is doing what Steve Keen says neo-liberals always do – they over simplify things -constantly and you are right to query it.
And where does this bullshit about everyone going on spending binge come from when Covid is over (if ever)? I think a lot of the more canny people now see things differently: they know that they cannot rely on the Government and that they have to build resilience in cash and not ‘things’.
Correct PSR – most especially on the timing issue
No doubt there will be short term pressure on prices as supply chains try to catch up with demand (and Brexit) but I’ll just add there are significant inflationary pressures in some sectors due pay restraint last year and shortages of experienced workers. I expect this will lead to futher polarisation and inequality, as those in the right place with the right skills will be in demand, but there will be many people who find themselves without a job and without much other support.
There is a suggestion that we might see a post-pandemic boom in the next decade, like the Roaring 20s after the Spanish flu. A more important factor there, I would suggest, was recovery after the First World War. And we know how that ended, economically in 1929 and politically in 1939. Also they did not have global warming to contend with, and the geopolitical situation is very different.
Inequality is going to be a massive issue
More even than now
I suspect that people might have a bit of a splurge – summer is here, there might be another lockdown – make hay whilst the sun shines, give ourselves a break. But not at the expense of longer term security. That’s the base line.
So I would expect those who know that their housing, income and basic requirements are insecure to sharply curtail the spend at the point at which their fun stops and the mundane kicks back in (DATA: check correlation with the weather, and ‘feel good’ content analysis of aggregated mainstream media reporting). Those whose long term security is covered by ie job security, income from assets etc will continue to spend. (DATA: which hard data + ’emotional indicators’ – keywords in the relevant media – can be used to identify that point, accountants out there?
So initially the aggregated spending data will show a spike, which will be hyped in the press and be interpreted as confirming the ‘inflation’ hypothesis. Consumer spending will then bifurcate in stages, re-establising two new base lines – one for for those with secure income, and one for those without. By the time this becomes apparent in the record, the policy generated by the initial decision regarding inflation will be interacting with each of these baselines, and the process goes into another iteration.
This kind of thinking isn’t really done across government, where information remains in silos and analysis remains behind the scenes. It certainly is not done to any accountable effect at the strategic level. The reasons for this are, to me, the most interesting of all. Sometimes I think I should run a master class for MPs. This stuff can be fun, and useful – it just needs to be socialised, at scale, to change public discourse. The concepts of liberalism, racism, elitism, populism, etc – great principles, fab for arguing – but entirely unfit for purpose when purpose is responsible government. Arg.
The Inflation con is underway.
Heineken, Carlsberg are shafting wholesale prices up by a SUBSTANTIAL amount resulting in a price of ale going up by over a £1 in my local!
By hook or crook we WILL have the inflation promised by the wizards.
Is there still a monopoly and cartel department?