There have been many suggestions made as to the cause of the current inflation in our economy, a number of them by me. Two things stand out for me when thinking about them.
The first is that so far no evidenced cause that can be addressed by an interest rate increase has been offered. Brexit, Covid reopening, supply chain problems, profiteering, war disruption and sanctions are all plausible contributors to the inflation. None can be addressed, let alone solved, by an interest rate rise. In fact, by adding to inflationary pressure (increasing interest rate rises is an inflationary price increase, after all) such an increase can only make things worse.
Second, I have so far not seen anyone suggest that the failure of Covid policy is to blame. I am doing so now.
Let me be explicit about what I mean. My suggestion is that the relaxation of the social distancing, home working, mask-wearing, quarantining and sick pay rules that existed until Covid was declared to be ‘over' are a significant factor in this inflation.
As evidence, I note that when former Bank of England employee and Monetary Policy Committee member Adam Posen argued that there was a moral duty on the Bank to create a recession now he said that this was because labour shortages would otherwise create an environment where wage rises were inevitable and would become locked into the economy, resulting in stagflation. His claim was that it was Brexit and other migration rules creating this labour shortage. I suggest he is wrong, at least in part, and maybe largely. I suggest instead that it is Covid that is creating these labour shortages.
I would also add that as yet I do not think that this is creating an environment where wage increases are even adequate, let alone close to becoming locked in. In that case, I do not think he got much right. But let me explore the issue I have raised and its short and long term consequences.
In my opinion, the evidence that too early release from lockdown and the abandonment of many of the measures to mitigate and prevent the spread of Covid, plus the abandonment of home working by many employers, has meant many people are now not willing or able to work any more. They have left the workforce as a result. As the ONS has noted, those aged above 50 and so more at risk of Covid have been especially inclined to leave the workforce since the end of Covid restrictions. As they have also noted:
Overall economic inactivity has increased by 522,000 persons in October to December 2021 compared with before the pandemic (October to December 2019). Most of the increase was because of those aged 50 years and over, contributing 94.4% (493,000) to the overall change.
These people have not just quit, but they are not going back. Add to them the number moving on from jobs because they realised during lockdowns that they just could not face returning to former employments and we see the reason for the wave of resignations now commonplace in the UK and also in the USA. Vacancies exceed the number available to fill them by so much because people have decided that the risk of working is not worth taking, based on this data. Brexit is not the problem. Covid is. Posen has it wrong.
Nor are these people moving to self-employment, where numbers are significantly down from the pre-pandemic era. They really are quitting.
If there is in that case a reason for wage rate pressure then it is within the control of the government to address it. It could encourage home working, require proper workplace ventilation, require quarantining and provide statutory sick pay so that it can happen. The shortage of skilled workers that is both harming the ability of the economy to meet need and causing wage pressure could be solved. It really is that easy.
But there is more to this than this simple short term suggestion implies. Long Covid is a reality. More is being learned about it every day. What seems certain is that almost no organ is immune from risk when a person has had Covid, and as importantly, successive bouts of Covid. Nor does age appear to provide much protection, although co-morbidities from existing risks result in greater prevalence in those who are older, almost inevitably. This makes the decision of those leaving the workforce entirely rational in that case. My question is, what happens if long Covid begins to seriously impact on health and morbidity?
We have seen the consequences of a health crisis creating a labour shortage in history. Following the Black Death in the Middle Ages a shortage of fit labour fundamentally shifted the balance of economic returns within the economy towards workers and away from capital. The shock was big enough to effectively end the feudal era (and I am aware I am offering a very brief snapshot of the era here).
I hope we face nothing like the Black Death. A functioning NHS should prevent that risk. But there is a possibility that we might see a real change in the health of the overall population in coming years. We are already seeing life expectancy fall. If both those able to work falls, whilst demand for care rises, and at the same time the pressure is created to meet existing material standards of living without changing the reward ratios between labour and capital then an impossible economic scenario is created. Like it or not, in that case the wages of labour will rise, but so too will inequality between those in and out of work, whilst care might become almost impossible to deliver.
Alternatively, the reward ratios in the economy would have to change. The return to labour would overall need to rise, including that provided by redistribution, and the return to capital, and most especially land might have to fall significantly, whether by imposition through tax, or by market adjustment, or both. If that readjustment did not happen the stresses in society in the face of increasing long Covid might become impossible to manage.
Add into all this the need for the management of climate change, which also demands major economic reorganisation and a reduction in the economic return to land, which has been exploited to push it to current unsustainable levels, and the mix is literally revolutionary in the demands it might make, although the Covid and green demands might be aligned (perhaps unsurprisingly as both might indicate the consequences of pushing nature to its limits).
In summary, I think we are missing a cause of inflation in the UK, and so a need for a better economic response to Covid that might well ease labour market shortages.
Long term, we need to think seriously about how to reorganise our economy. There is no doubt that Civid is here to stay. The thinking on what that means for the economy has hardly begun, but needs to do so, now.
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Agree, the downplaying or ignoring the fact of the continued rate of Covid infections and the build up of long-covid cases by government and media (mostly) is a major problem and a contributory factor as you point out. This certainly is contributing to inflationary pressure but ignored by the pundits who are still in a 1970s class war mindset and want to keep wages well below the inflation rate and to keep people in rubbish jobs that nobody wants to do.
When LC kicks in, and there seems little doubt it will, you won’t have the necessary workforce needed for capitalism to survive in its present form if at all. There won’t be the same NHS either as medical staff of all grades and in associated industries too will be suffering. We may well find part-time working to be the norm in all sectors, posing difficult questions about how such a society could function. Robots doing the essentials? Perhaps, but we aren’t there yet and any concentration of effort necessary to facilitate that would probably be sabotaged by the staffing shortages it seeks to remedy. Meanwhile, India grows nearer to becoming unable to sustain human life and our leading papers are full of Kier Starmer eating curry. Perhaps we don’t deserve to survive.
My sector is being hit by the over 50’s leaving as well as the under 50’s leaving to get better paid jobs in the private sector.
Those over 50’s leaving the public sector are leaving with lower pensions too as a result of 2003 ‘s nonsensical ending of final salary pensions and as a result of 12 years of unneeded, unjustified austerity and effective wage decreases which we put at as an effective 25% pay decrease.
So a significant number of those over 50’s are entering retirement with no money to burn really, out into the COLC and an increasingly Rentier State.
The country faces becoming backwards economically as I see it.
If an economy is effectively that everyone’s wages are someone else’s wages, then some of our idiot politicians have not been listening and still don’t understand.
COLC?
Cost Of Living Crisis?
Cost of living crisis.
“Cost of living crisis”, probably.
COLC = Cost of Living Crisis.
30 years or so after the Black Death, we had the Peasants’ Revolt.
Hopefully things happen a bit more quickly today .
My brother caught Covid early in the outbreak and has suffered long Covid ever since which has severely affected his ability to do his job. He had a job using computer to predict the shape of proteins just from the chemical make up and large complex bespoke databases. He has only seen a slight improvement in his symptoms. I expect that a significant number of people have found it difficult to continue or return to work due to long Covid.
In this article you mention several causes of inflation but omit one that you have focused on several times previously: wealth and high incomes.
> Inflation in the UK is being driven by the wealthy who can pay higher prices. The Bank of England has rewarded them by increasing interest rates today, increasing their incomes, whilst charging those on low pay more. This does not solve inflation, but it does increase inequality
https://twitter.com/RichardJMurphy/status/1522180039814664192
> Then there should be tax increases on wealth and high incomes – because those who enjoy both are the people really driving inflation, and both have also been undertaxed for far too long – which is why we have such an unequal society, as this crisis is showing.
https://twitter.com/RichardJMurphy/status/1521736524529913856
It’s clear how increased progressive taxation would increase equality and I’m all for that, but can you expand on how wealth and high incomes are driving inflation and how they could be taxed to reduce inflation?
Do you think it is possible to estimate the magnitude of the contribution of demand side contributions to inflation (mostly from wealth?) compared to supply-side issues you mentioned above: Brexit, Covid reopening, supply chain problems, profiteering (is this one supply-side?), war disruption and sanctions?
I ask because I have read that taxation of wealthy individuals usually reduces their savings but not their consumption. Perhaps you think that reducing their savings will reduce asset price growth and therefore e.g. housing costs? Perhaps also that reduced savings reduces the capital available for speculation?
Thank you sincerely for reading this and thanks again if you choose to help me understand this stuff!
a) High wealth and income drive inflation because those with them have the spare cap[city to pay more for goods and services in short supply subject to price increases – so they empower the price changes
b) Increasing tax reduces this spare spending power
c) It is only guesswork on all forecasts on what will impact inflation – we live with uncertainty here
One obvious solution that doesnt seem to be looked at is improving the very low productivity of the UK economy.
As we get older, additional health complications start to kick in and this is in addition to the compounding effect of Covid. My neighbour, who granted is well past retirement age was told quite clearly that her body was fighting low level cancer successfully until she contacted Covid and her body was no longer capable of beating the cancer and she is now terminal and putting her affairs in order sadly. The Covid impairment will also make recovery from other chronic illnesses less successful and his will have a substantial impact upon the lives of many people over ever 40 to the point that whereas once they could ‘struggle’ and continue to turn up for work, now, post Covid, they will be so impaired that they will have to be signed off sick for things like COPD, emphysema, cardio-vascular impairment as well as immune-system related conditions such as arthritis.
Add to this that in the past 13 years, the Tories have committed wholesale underfunding of the NHS solely for ideological reasons and a waiting list of 6m cases, many people who might have been given prompt surgery or other treatment in the Noughties now may have to wait 5 years during which time each individual will sustain needless extra pain, a reduced life expectancy and no chance they will ever be able to return to any form of productive work.
The Tories, and sadly Blair before them, by removing state funded tertiary education has meant fewer medics, engineers and scientists to sustain a healthy population, skilled industry and education to the point that the physical and mental health of the nation is imploding since for the economy to work, it needs working and lower middle class people to enter those professions.
To make matters worse, even the manual trades have been impacted since prior to 2010 it was possible for a young person of say, 20 to go back to college for free to train to be a plumber, electrician, joiner or bricklayer. That avenue is no longer possible which explains why finding a tradesperson is nigh impossible for building repair and maintenance let along new home building. Meanwhile all the ‘baby boomers’ are entering their 60s are retiring in large numbers.
It is not as if any of this comes as any big surprise of course, the age composition of the population is known well in advance but too many assumptions were made that the golden years of the 60s and 70s of fair incomes, free education and a safe and secure NHS to permit lifelong fair prosperity and health into old age was still happening. Sadly, all of this was reversed in the Thatcher years and so everything is going in reverse – all thanks to the Tories.
A healthy population with secure employment and housing might have been able to cope through a health or economic crisis (as in 2008) but the past 14 years has been a metaphorical kick in the nuts for everyone other than the toffs and crooked shysters and the level of problems we now face might even be impossible to reverse even if there was the political will to substantially invest in the people and public infrastructure of the UK.