As the twin, malign impacts of Brexit and coronavirus cross over, with the economic damage of covid-19 beginning to fall as that of leaving the EU begins to rise, the FT this morning carries an article by Martin Wolf about inflation. The markets, says Wolf, expect the recovery in the world economy from what has been a truly terrible year, to be steady with a "a modest and desirable rise in inflation expectations and inflation-risk premiums, especially in the US. Stock markets also remain confident of future profitability."
I am no expert and this may well be true, but the article says the risk of inflation becoming a problem is rising and it seems to me we have history in this country with inflation getting out of control. And we have a huge debt burden so even a modest rise could have disastrous short term effects.
Many people, including some economists, will think a bit of inflation is good because it allows the government to inflate away the value of our debt until it's worth little or nothing.
Wolf sets out both sides of the argument and quotes credible sources who think we are heading for a period of high or higher inflation.
"As labour forces shrink, this book [The Great demographic Reversal] suggests, the number of consumers will rise relative to the number of producers, thereby raising prices. Fiscal pressure will rise inexorably, as the population ages. If governments have to choose between inflation and fiscal tightening, they will choose the former. Finally, if interest rates rise too high for comfort, governments will force central banks to lower them."
Others are more sanguine, but anybody who lived through the late sixties and the first oil shock will remember all too well what inflation does to an economy. As an electrical design engineer at the time, we used to have product catalogues with separate printed price lists. On the face of every price list in our drawing office were various notes that looked like this: +5% +7.5% + 10%
+ 15% and so on. Often the price lists were out of date before they arrived.
You had to add a few per cent to every job estimate to cover the price rises between the date you quoted and the date you might be delivering it. Before anybody placed an order it was necessary to check the prices were still OK. It was a total nightmare.
I confess, I worry about this sort of thing repeating itself since our record of controlling inflation when it comes is just so bad. Mrs Thatcher manage to do it but at massive cost to community cohesion, especially in mining areas. The legacy is still with us forty years on.
And this time we have the added structural problem of Brexit. I think the government will come under a lot of pressure to add to the £23 million allocated to prop up the fishing industry and the £80 million to Nissan as a persuader to remain in Sunderland. There are now calls to help Liberty Steel survive and no doubt the food industry will soon follow.
And they will probably get it. A precedent has now been created that The UK Treasury will provide support. Having done so (rightly) for companies struggling under the impact of Covid-19, they have less grounds for refusal on Brexit since this isn't even a natural disaster but a man-made one, encouraged and enthusiastically pursued by the party in government. They can hardly refuse help for Brexit hit industries.
We are now returning to the time before we joined the EEC, when everybody looked to Whitehall to keep companies and industries going. Membership of the EU and its firm policy on state-aid was part of the reason for joining the bloc. Controlling inflation was another.
Weak politicians couldn't resist coughing up a few million to keep the UK motorcycle industry going a bit longer and the same with several failed attempts with the car industry's head above water. Both failed. The EEC provided our political leaders with a bit of cover - blame it all on Brussels.
Inflation was hard to control for the same reason, It takes harsh and unpopular policies as we found out in the 1980s. How much easier is it politically to print a bit more cash? NHS staff are already calling for a pay rise and who can blame them? But if the government concede anything substantial others will soon follow suit in the public sector and the private sector won't be far behind.
Now we are out of the EU, we have the same productivity problem but exacerbated, the loss of a lot of migrant workers will tend to push up wages anyway, less pressure on state aid outside the EU and a weak, populist prime minister. All the conditions are coming ominously together.
If all this doesn't keep Sunak awake at night, perhaps it should.
