As UK inflation hammers the poor, we need a revolution in policy

Labour should back a plan to cap prices and rents, and cut profits not wages.

Illustration by Jon Berkeley / Ikon Images

Ed Miliband has called the cost-of-living crisis a “social emergency”. With the 18 May CPI inflation figure surging to 9 per cent, he is right. His back-bench Labour colleague Dan Carden spelled out the consequences in the Commons: a 62-year-old constituent in Liverpool Walton had disconnected herself from the mains gas supply for fear of the bill she will receive in a few months.

And it’s not just about energy. Carden told me that, at a local chip shop, the cost of a fish-and-chip supper for one person has gone up to £8.30, largely due to the price of sunflower oil rocketing because of the Ukraine war. With a chippy forced to hike the price every few weeks, the most iconically basic food in Britain is now too expensive for working-class families to eat.

The government’s response has been so dire that it could kill Conservatism for a generation. Rishi Sunak increased benefits and pensions by just 3.1 per cent in the Spring Statement while handing just £500m to the poorest families through the Household Support Fund – a form of 21st-century poor relief.

It has allowed the energy regulator, Ofgem, to protect profits rather than people: the next hike in energy prices will come sooner, and hit harder – with companies being forbidden to undercut the market price of gas and electricity in order to “stop the harmful effects of competition”.

In other words, even the basic instincts of capitalism – to cut prices and gain more customers – are to be suspended in order to inflict pain on consumers across the board. As Ofgem briefed its new poverty-inducing regime, even the mild-mannered money expert Martin Lewis erupted – he called the scheme “a f**king disgrace”.

Let’s be clear about the causes of the price surge. They are Brexit, the post-Covid scramble for people and goods across the globe, the Ukraine war and the persistent inability of British workers to achieve wage rises to match inflation.

Brexit has wrecked the UK’s existing trade patterns with Europe, causing supply bottlenecks and shortages of key workers such as HGV drivers. When the post-lockdown recovery began, major industrial powers responded by trying to corner the market in scarce goods – above all semiconductors – causing a scarcity of new cars, computers and phones and raising the price of everything.

The Ukraine war has hiked the price of gas, oil, wheat and cooking oil. Meanwhile, even with a shortage of workers – from delivery drivers to nuclear power engineers – real wages have fallen 1.9 per cent this year.

The Tories, and their media supporters, are trying to lump the blame on the Bank of England. Having trashed one British institution after another, that’s understandable. But the bank only works to a government-set remit. It has refrained from steep interest rate hikes because it believes the inflation spike is short-term and caused by global factors that higher interest rates would not suppress.

If Rishi Sunak is not happy with the Bank’s performance he can write a letter saying so, or alter the inflation target (2 per cent). He has not done so. His last open letter, written on 17 March 2022, simply agreed with the Bank’s assessment and listed the meagre palliative measures in place.

And let’s be clear about the effects. Even if today’s 9 per cent inflation print is the peak – and the Bank expects the peak to come in the autumn – that represents a major transfer of incomes from ordinary people to rich people and businesses.

At the local chip shop, everyone in the supply chain has to make a profit – from the sunflower oil farmer to the fishing fleet to the potato grower and the transport firms that get everything to the wholesaler. So does the energy supply company whose electricity boils the fat and lights the shop. In the process, for the most powerful – and there is no clearer monopoly than in the energy market – comes the opportunity to profiteer.

The only actor in the market who cannot hike their price is the worker, whose power to fight for better wages has been destroyed by decades of union-busting legislation and atomised social consciousness. There is only one way to break this cycle: an emergency plan to suppress price rises, tax the profiteers, boost the spending power of working-class families and hike wages.

Its monetary element would be a freeze in interest rates. There is no point in the Bank increasing them and little point to the tit-for-tat point-scoring between the Bank and the Tory press.

Its fiscal element would be, first, to scrap the £5bn National Insurance rise and, second, to impose a windfall tax on oil and gas producers bigger than the one Labour has proposed and commensurate with their obscene profit-taking.

But its centrepiece would be a wages and prices policy. It would not need to be permanent (though there are strong arguments for long-term intervention). The government already caps the price of household energy, at a rate guaranteed to keep the privatised energy suppliers in profit. It should freeze the energy cap for two years, allowing retail prices to fall rapidly if wholesale prices force the suppliers to accept losses in the meantime.

The government should announce a national rent freeze, again for two years. Sadiq Khan, who is pushing for this policy in London, calculates it could save the average family in the capital £3,000 over two years.

Meanwhile, the cost of all local public transport should be slashed closer to London bus prices: £1.60 a journey – with a temporary government subsidy to make up the shortfall to private bus and rail companies, and a ban on any route closures for six months.

Who would suffer? Landlords, energy suppliers and privatised bus and rail companies. They would lose profits and workers would gain spending power. If this appals you and sounds like something close to communism, switch the equation. Why is it just that workers’ incomes fall and profits rise in this crisis, but not the other way around?

Labour, of course, will do none of this. It has found, in a windfall tax and a cut in VAT, the perfect political levers. The windfall tax would raise just £2bn – a sum that does not sound radical to voters because it is not radical. Sunak, having resisted the policy, is now minded to consider it. Labour will get a day of glory in the Commons but nothing will be solved. Even if you add a temporary cut to VAT, and boost the Warm Homes Discount to £600 per family, this is not an adequate response to a “social emergency”.

Labour, like the Tories, is fighting a new crisis with old tools. The crisis is a combination of external shocks (Covid, Ukraine), with severe structural weakness (wage bargaining power), long-term austerity and the self-inflicted wound of Brexit. The old fiscal and monetary tools, even if used fast and effectively instead of slow and reluctantly, will not suffice.

The pollsters tell Labour that the cost of living is driving everything in politics – but that the party is still not trusted enough with taxpayers’ money. All the more reason to focus emergency measures on the private sector: price caps, rent caps, subsidised transport and – if needed – subsidised food. These measures may sound shocking, but if inflation tops 10 per cent for any length of time so could the results for society.