The UK inflation rate rose massively in 2022, exacerbating the cost-of-living crisis across the country. What can be done to counter these economic burdens?
We are going through an economic downturn with signs of a robust recession. All commodity prices traded nationally and globally have risen and industrial relations are in turmoil as one after the other unions across the UK call on strikes. Average regular pay (excluding bonuses) grew by 6.4% in September-November 2022, but in real terms, it has fallen if you factor in the UK inflation rate – which is currently at 10.5%.
The UK inflation rate eased slightly in December and January but this is not due to the increases in the base rate of the central bank, but due to the lower price rises in motor fuel. Food inflation continues to score as high as 17%, which is on par with the food inflation of the late 1970s.
Food inflation continues to score as high as 17%
In the year to December 2022, electricity prices rose by 65%, and gas prices by 128.9%. Prices have also skyrocketed in passenger transport by train, coach and aeroplane and similar trends are underway in restaurants and hotels. Increases in the base rate of the central bank directly affect the mortgage sector, households and families.
The income per household on average will fall by 7%
According to data from the ONS, some 1.4 million fixed-rate mortgages will come to an end in 2023. The mortgage bill becomes hefty inasmuch as re-mortgaging means that households will have to borrow at a rate of at least 6%, if not higher – currently, their borrowing fixed rate is below 2.5%. After consecutive increases over the last year, the current base rate is at 3.5%, and it will get higher. The Office for Budget Responsibility said that the tax burden would rise to its highest level since the 1940s at the moment when income per household on average would fall by 7%.
More blunders trying to tackle inflation: the “warm homes discount did not factor in the interest rate increase by the Bank of England
Last year the government tried to tackle inflation and the rising cost of living with a number of half-baked measures, such as a £150 council tax rebate for homes in the lower bands A to D, or a reduction of energy costs per household – the so-called “warm homes discount”. They did not work, as it did not factor in the interest rate increase by the Bank of England. In fact, core inflation continues to rise in parallel with the rise of the base rate. Currently, households are entrapped. They are faced with high taxation regimes, low disposable incomes and a hostile policy environment. What is the solution? The answer lies in spotting the real structural, long-term cause of inflation.
The economy is still reeling from the global financial crisis in 2007
OECD countries also experienced double-digit inflation figures in the 1970s, following the collapse of the Bretton Woods system in 1971 and the two oil shocks (1973 and 1979). But the structural causes of the UK inflation rate back then differ from those of today. In the 1970s, it was a declining industrial infrastructure coupled with high wages and a powerful trade union movement that pushed entrepreneurs to adopt inflationary policies in order to compensate for the falling profitability of their enterprises. Today no such elements exist as the demand side of the economy (wages, welfare state) is still reeling from the global financial crisis in 2007.
The disruption of global supply chains has played a very important role in boosting inflationary trends
The structural problem, in other words, lies with the supply side of the economy which is unable to generate sustainable growth and profitability even under favourable industrial relations regimes. No doubt the disruption of global supply chains has played a very important role in boosting inflationary trends. The period of the pandemic, as well as the Ukraine crisis, disrupted the Euro-Atlantic connection with Asia upsetting the monetary and fiscal equilibria that began to take hold in the wake of the Euro-zone crisis. But these are conjunctural factors.
Sustainable growth occurs when profitability is high
The long-term structural reason for the inflationary trends is the weakness of the aggregate supply to generate sustainable growth and support aggregate demand (high wages, welfare state). Sustainable growth occurs when profitability is high and a large part of it is re-invested in order to create more profit.
But profits, simply, cannot rise if the labour productivity is low, something which occurs in the UK and most Western economies – but not in China or other emerging markets. Weak labour productivity has been a permanent feature of Western economies since the loss of their industrial base in the 1980s and 1990s and the adoption of a service economy. As a result, the long-term solution to the problem of inflation is the structural reform of current public policy and the adoption of a policy of public and private investment in industrial, high-tech projects, restoring profitability, labour productivity and higher wages.
Vassilis K. Fouskas is a Professor of International Politics & Economics at the Royal Docks School of Business & Law and Co-Director of the Centre for the Study of States, Markets & People (STAMP), University of East London.