Inflation is back. That old foe of central bankers, mugger of pensioners and fashion staple of the 1970s is once again in the news. Its return is being talked about at Threadneedle Street and at the US Federal Reserve. It is creeping into newspaper headlines and on to market-watchers’ worry lists. But some perspective is essential: the price rises of today are nothing like those we saw half a century ago, because the world we live in is nothing like that one. Many of the fears expressed over any sign of rising prices are misplaced.
Economists are perhaps not the first people you might want to hear from about fashion, but one guaranteed revival for this spring/summer is: price rises. They will be in the news a great deal over the coming months. Last week’s news of a doubling of the inflation rate is just the beginning. The primary reason for that is mechanical. Last year saw many parts of the economy put in deep freeze to prevent the spread of Covid; with the reopening of pubs, restaurants and clothes shops, and the return of high street spending, prices will tick up. In this sense, inflation is to be welcomed as a sign of economic growth after a record slump. Another factor will not have passed motorists by: fuel prices, both at the petrol pump and to heat homes, are on an upward march.
The final trend is more specific and has been less remarked upon, but in some industries materials and labour are in short supply. The big example is construction, where timber costs 80% more than it did in November and paints are up by a third. In London, workers are not as readily available as they were before the pandemic. Some from other countries and those with strong networks abroad have left entirely. Why stay in an expensive city when you can’t earn a crust and the welfare state won’t help? Far better to go. For years, the Conservatives have suggested that the UK has the wrong type of immigrant, those who are insufficiently skilled – that the country needs fewer builders and baristas, and more bioscientists and bankers. We are about to find out the costs of such a shift.
After the crash of 2008, rich states stepped in to save their banks and prop up their economies. The result was a confected panic over debt-to-GDP ratio. The enemy after this crash is apparently inflation. But the big difference is that in the 1970s politicians and policymakers worried about inflation in wages; whereas 50 years later, labour has been crushed as a force. The British labour market is remarkable for the prevalence not of pushy trade unions, but precarious zero-hours contracts. The reopening of our economy will reveal much weakness and high unemployment. This is a time for stimulus and repairing a broken social contract. Get people into work, especially the young, who have lost many opportunities in the past 15 months, and ensure key workers are better paid and protected. First things first.