Andy Haldane, the chief economist for the Bank of England, writes in this week’s New Statesman that “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”. The £200bn of “accidental savings” imposed by the pandemic are set to turn into a summertime spending spree that will, owing it to travel restrictions, occur largely within our borders.
The British Chambers of Commerce published its latest economic forecast this week, in which it predicted that if the government’s roadmap for opening up is followed, the “release of pent-up demand” in consumer spending will boost the UK’s GDP growth for 2021 to 6.8 per cent – “the strongest outturn since official records began in 1949”.
But this demand is being unleashed into a world of shortages. Among the wider effects of the pandemic are global shortages of computer chips, building materials and shipping. “The laws of economic gravity,” writes Haldane, “suggest prices should rise,” and they may do so for some time because in this financial crisis a virus, not a systemic failure, is the cause.
In the 1970s, inflation was partly the result of a wage-price spiral: the strong presence of trade unions in workplaces led to extensive bargaining for higher wages, and the greater affluence of workers drove prices up. This time, writes Haldane, wages could be driven up by demand, as companies have to pay more for workers amid skills shortages.
James Meadway agreed on 4 June that the skills shortages created by the pandemic “create the potential for labour’s bargaining position to be improved”, especially now that “union membership in Britain last year rose at its fastest rate since the late 1970s”.
However, this rise was accounted for by public-sector workers. In the private sector, union membership remains close to its lowest-ever level. The people with the prized skills in the private sector are those in professional occupations, who also have more than double the union representation of sales and customer service workers.
This makes Haldane’s argument for preventing inflation now all the more pertinent, because while the benefits of a hotter economy will accrue mainly to those with more money, price rises will be most serious for the less well-off.
Xavier Jaravel, an economist at the London School of Economics, demonstrated the effect of “inflation inequality” in 2018 when he compared almost a decade of prices for supermarket products, and found that those items bought by people on lower incomes rose in price more quickly, because there is more innovation and competition in the products made for higher-income shoppers.
As Haldane observed at a conference on inequality earlier this week, inflation also drives inequality in housing. The housing market, which he described as “on fire”, has risen 10.9 per cent over the past year, demanding greater investments from those at the bottom of the market (or excluding them entirely), while enriching those who already own a home. Rents rose 6.4 per cent over the past year, further impacting the ability of renters to save.
Still more urgency is added by much of the money saved over the past year heading not into the cash-strapped shops and restaurants of the high street but into the savings products of the middle class: the Investment Association recorded that in April alone, British savers paid £1.5bn into ISAs.
We are in a “dangerous moment”, Haldane warns, because recovering from significant inflation would be much harder than preventing it. Milton Friedman once compared inflation to alcoholism: “the good effects come first, the bad effects only come later… there is a strong temptation to overdo it”.
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