new year. same lies
This year’s first PMQs picked-up where last year’s left-off with lies a’ plenty. Deputy leader of the opposition, Radiant Rayner kicked-off with a simple enough question enquiring if Bojo had changed his mind wrt the inflationary nature of our current economy as, back in October, he stated on Sky News that it was nothing for anyone to be concerned about. Notwithstanding the camera never lies, his answer was to deny he’d ever said such a thing and it set the tone for the remainder of his stay at the dispatch box: five more blatant ones followed by a whole raft of smaller white ones. Same old, same old.
However, contrary to our fork-tongued PM’s opinion, inflation is going to be an issue this year and, as the consumer price index hits 6%, we need to appreciate this and accept the scourge of entrenched inflation is making a comeback. In turn, this will erode our savings, diminish our collective purchasing power and, being regressive, will impact the poorest within society the most.
Inflation is nothing new and is an economic phenomenon that dates back millennia. Ancient Egypt witnessed a classic inflationary cycle when Ptolemy IV devalued the currency to recoup the costs of fighting his Syrian war. Similarly, in the late Roman Empire, to counter the effects of the Antonine Plague, the authorities began adding impurities to their silver coins so that more could be brought into the system. Consequently, by AD 250, an inflation rate of 10,000% contributed to their eventual collapse. The most notorious recent example is the German experience of 1923, caused by the Reichsbank’s decision to print money to offset their war debts, which led to the papering of walls with bank notes as it was cheaper than Lulu Lytle wallpaper and cash to buy a single loaf needing to be taken to the bakers in wheelbarrows.
Traditionally, inflation results from either an increase in production costs such as raw materials, wages, fuel or transport (cost-push) or an increase in demand for product and/or services (demand-pull) and we’ve obviously seen both in play during the last two years. A third cause, an increase in the overall supply of money, quantative easing (QE) as a means of stimulating spending within the economy, has also taken hold during the pandemic. Furthermore, expectations of higher inflation are themselves inflationary as we buy now to avoid the expected higher prices, which is why, once it’s out, it’s difficult to get the inflationary genie back into the bottle.
A little inflation is no bad thing as, by encouraging borrowing and spending, it’s actually a sign of a healthily growing economy and accounts for why central banks set a sweet-spot target of 2%. Ironically, a deflationary spiral in which prices, wages and spending/borrowing all fall is even harder to combat. Japan, which has been struggling with it for over three decades, is a case in point.
‘The Great Moderation’, a twenty-five year era of low-ish inflation coupled with high economic growth, lasted until the financial crash of 2008 and was replaced with our own period of relative deflation. With all the above, isolationist policies being in vogue and globalisation being rolled back, a reduced reliance on China as both manufacturer and market, and western society being aged and less spendthrift, Dishy Rishi is praying that our current inflationary blip is exactly that, a blip. Nevertheless, the warning from history is clear: all periods of high inflation appear temporary at first and now is the time to tighten our collective belts and batten down the hatches as considerably higher prices and a corresponding cost-of-living are on their way.
