It would be a huge understatement if I was to say that the inflation, the current energy and the cost of living crisis is negatively affecting people’s lives. There is no doubt in my mind that we are not even close out of the woods and as predicted by many economists, the aftermath of the ongoing hardship will continue for many months, if not years.
The consequences of government policies, since COVID but also in recent years, has dominated many of my conversations with my friends and colleagues. There are thousands of stories of people, who are having to make a lot of really tough decisions. Some are planning to move back to Poland but they are struggling to sell a property, due to high interest rates. Others have no choice but to have two jobs to simply survive and maintain their various financial commitments. The number of Food Banks and its users have gone through the roof. The impact of this crisis on mental health agencies has been enormous; anxiety, depression, fear of house repossession are only a few examples of how the current state of affairs is affecting people’s finances and wellbeing.
This week, I had a meeting with our mortgage advisor. It is scary, when on top of all the other core costs e.g. energy or food, we will be asked to pay an extra £480 each month from January. My wife and I both have two jobs. In my case, it includes a Cllr allowance, and we hope that with a bit of re-budgeting, we will be able to “survive”. That’s the reality for thousands of families in the UK, but also across the globe. We are lucky in many ways; no wars, reasons to flee or escape fires or heatwaves. However, will this offer any comfort or consolation to our families?
The future is bleak and I am not too sure what I would have done differently to support some people across the country. Would extra taxation of companies such as BP, Shell, which made millions in the last year, help? Could extra borrowing ease the burden a bit? Would relaxation of the current immigration rules help to plug the gaps across many sectors of our economy, where there is a clear shortage of labour? What about much needed investment in our NHS or infrastructure? Where is that funding, that was promised to build 40 new hospitals? Our social care system is broken; only in the last 24 hours, BBC investigation announced that many patients are waiting months to be discharged from hospital, with one person waiting 11 months(!) to be released. Unacceptable. Is our once thriving UK economy on its knees?
I am very angry, and so are many others, that none of the politicians within the current and previous 3-4 governments “own” their broken promises. Where is their accountability or simply a human decency to acknowledge their massive mistakes? Is it because they really are living different lives and they are complexly detached from the ordinary reality of many hard-working citizens? Do any of them even vaguely understand the daily struggles of families, who are desperately trying to feed their children? I am not too sure.
So what is the alternative? Do we really believe that electing a new government will change our financial outlook? Hm… The current government will, like mantra, repeat their election promises; growing the economy, halving the inflation, sticking to their budget plans and stopping the boats. It is truly tragic that after years of the Conservative administration, some of these issues have worsened and the impact of their political mismanagement will be felt by many for many years to come, whoever will come next to govern.
* Michal Siewniak is a Lib Dem activist and councillor for Handside ward, Welwyn Hatfield.
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22 Comments
” It is scary, when on top of all the other core costs e.g. energy or food, we will be asked to pay an extra £480 each month from January.”
Yes. However, this is an aspect of inflation which is entirely unnecessary and self imposed by government.
The rationale is that transferring £480 pm of your spending power to give the bank from which you have borrowed it an extra £480 of spending power somehow it helps to reduce inflation by reducing the money supply. It doesn’t reduce it at all. It just transfers money from yourself and your family to someone else.
If we have an inflation problem we should all share in the burden of reducing it. It shouldn’t be expected to be borne by those who are the process of buying a home.
It doesn’t make any sense to try to apply a monetarist solution to a problem which had a fiscal origin.
Thank you for an important and heartfelt article!
If you seek well founded ideas and information on the current government inflicted socio-economic problems, please look at “Funding the Future”, formerly “Tax Research U K” which is run by Richard Murphy. Probably it is most easily found by typing in “Richard Murphy Blog”.
Here are some relevant samples:
https://www.taxresearch.org.uk/Blog/2023/07/31/there-is-lots-of-money-available-if-you-know-
https://www.taxresearch.org.uk/Blog/2023/07/30/why-does-the-uk-do-so-badly-economically/
https://www.taxresearch.org.uk/Blog/2023/07/28/the-bank-of-england-wants-to-make-a-loss-of-150-billion-so-that-goverments-will-be-forced-to-cut-spending-that-is-the-real-banking-scandal-of-our-time/
If you could persuade H. Q. to look at this site it might help our party and, most importantly, our country.
We have been here before, Michael. It is called stagflation or recession-inflation. It is a situation in which the inflation rate is high or increasing and the economic growth rate slows. The difference between the stagflation of the 1970s/80s is that unemployment remained steadily high then, while unemployment has remained steadily low today.
The price rises we have been experiencing are a combination of monetary inflation arising from loose monetary policy in the expectation that inflation would be transitory; and supply constraints brought on first by the pandemic and then the Ukraine war, followed by a global spike in consumer demand as restrictions were lifted i.e. excess consumer demand chasing too few goods as excess savings accumulated during the pandemic are spent.
As those accumulated savings are drawn down the excess demand should dissipate and generating economic growth will become even harder than now. The downside is a spike in unemployment and potentially a deep recession regardless of who will come next to govern.
Who governs will be important in determining how the burden of falling per capita GDP and lower living standards is distributed across the population.
@Joe Bourke
Was it necessary for you to tell us yet again what you believe the root causes of our problems are?
The OP was about the impact on individuals and families – what do you have to say about that?
Nonconformist,
What I have to say is how the comment ends “Who governs will be important in determining how the burden of falling per capita GDP and lower living standards is distributed across the population.” i.e. in a nutshell the level of redistribution effected through the tax and welfare system.
Food price inflation hits people on low incomes more than most. It lags the Producer Price Index (PPI) by around six months so is expected to fall sharply as shown in the graph in this article…
‘UK food price inflation set to fall sharply’ [April 2023]:
https://julianhjessop.com/2023/04/19/uk-food-price-inflation-set-to-fall-sharply/
“The difference between the stagflation of the 1970s/80s is that unemployment remained steadily high then, while unemployment has remained steadily low today.”
There isn’t that much difference. Unemployment was low in the 70s and, even though Mrs Thatcher won an election on the slogan “Britain isn’t Working” unemployment only started to rise in the 80s when her government applied a fiscal and monetary squeeze.
Neither is there much difference in the cause. In the 70s, there was a supply shock due to the steady rise in the price of oil which had a knock on effect to the price of everything else. Then, as now, workers tried to maintain their living standards by ‘industrial action’. If there is a difference, it is that there is now a better understanding that workers, rightly or wrongly, are reacting to price rises rather than being the cause of them.
@ Steve,
“If you could persuade H. Q. to look at this site it might help…”
OK but you might also advise that it’s probably not a good idea to write anything in the comments section! Richard Murphy is somewhat of a self opinionated maverick. He openly disagrees with all the main names in MMT, and not just on minor points, even though he claims to be a MMTer himself.
Anyone who disagrees with him is soon blocked. I doubt if the main Lib Dem economic spokespeople would last long on there!
Peter Martin,
Inflation in the 1970s developed before the oil price shock. It was already becoming an issue in the mid-1960s, was exacerbated by the 1967 devaluation of sterling, Nixon’s closing of the gold window, the Barber boom and bust and then the Opec oil crisis of 1973.
Back in the 1960s, the economist Arthur Okun came up with a simple way of summarising the change in national welfare. The misery index is just the sum of two economic “bads”. They are: inflation and unemployment.
After the quadrupling of oil prices in 1973, subsequent high inflation saw the misery index approach 30 in 1975. The stagflation of the late 1970s meant that the misery index was about 25 in 1980 following the Iranian revolution. During the early 1990s recession, the misery index also spiked at over 16 in 1991 and close to 13 after the financial crisis.
In the wake of the Pandemic unemployment has remained historically low at below 4% compared with around 6% in the late 70s and over 10% in the 1980s. Fortunately, we have not seen that level of unemployment in recent years and I expect the BofE (and next government) will be very cautious about causing a recession that would raise unemployment significantly.
@ Joe,
As often, you make a statement without giving a reference. In any case we weren’t in disagreement that there was an inflation problem in the 70s. I questioned your statement that unemployment was high.
There, were, as you say other factors for the inflation. The Barber boom of the early 70s was an early instance of a Tory government wrongly believing that only an increase in government spending could lead to inflation. Nigel Lawson was later to get it wrong in the same way.
However, if you look at the graph below it is obvious than inflation really took off after 1973 and the first oil crisis. 1973 was also the year we joined the then EEC. You didn’t mention that one as possible factor. 🙂 A more popular, though wrong, view at the time, was that it was down to the introduction of decimal currency.
The price of oil rose for everyone and even the inflation averse Germans had a problem at the time.
https://www.economicshelp.org/blog/5720/economics/inflation-stats-and-graphs/
@joe
>” The price rises we have been experiencing are a combination of monetary inflation arising from loose monetary policy in the expectation that inflation would be transitory; and supply constraints brought on first by the pandemic and then the Ukraine war, followed by a global spike in consumer demand as restrictions were lifted i.e. excess consumer demand chasing too few goods as excess savings accumulated during the pandemic are spent.”
Do you actually live in the same country as the rest of us?
The price rises have had very little to do with monetary inflation, even the Bank of England admits to that and to there being little it can do to mitigate those factors, but plenty it can do to make matters worse, by giving the banks reason to increase the costs of borrowing.
over 80% of the “inflation” we have seen are due to global events, which the UK due to decades of poor government are overly exposed to.
Inflation can be transitory, it is clear the government playing silly games over wages, plays a larger role in whether inflation is transitory or prolonged. Likewise, with “investors” demanding businesses produce even larger profits, regardless of actual market growth play an even bigger part in price rises.
BTW, some business experts are forecasting businesses being in difficulties in 2024 due to the high level of debt they are having to service and lack of real market growth, a situation encouraged by the debt leverage thinking which has held sway since the early 90s.
Peter Martin 2nd Aug ’23 – 2:32pm:
1973 was also the year we joined the then EEC.
Protectionist EEC tariffs dramatically increased food prices. The money supply was inflated to lubricate our entry. My father worked for a provisions importer slapped with huge price increases; one reason why our family always saw EEC/EU membership as barkingly stupid. De Gaulle was right…
‘Why did Britain join the EEC? A Revisionist View’ [2015]:
https://www.qmul.ac.uk/mei/news-and-opinion/2015/items/why-did-britain-join-the-eec-a-revisionist-view.html
Now, after decades of coercive marriage to the EU, the government is too timid to remove tariffs…
‘The Potemkin trade deal with New Zealand.’ [May 2022]:
https://www.briefingsforbritain.co.uk/the-potemkin-trade-deal-with-new-zealand/
Roland,
this article will explain it for you UK interest rates need to stay higher for longer to beat inflation, says IMF
“Core inflation – a measure of the cost of living that strips out items such as energy and food – remained high and well above the targets set by central banks. In response to the persistence of core inflation, major central banks have communicated that they will need to tighten monetary policy further,”
Lower inflation doesn’t mean prices fall. It just means they rise less quickly.The BofE has admitted that admitted that price inflation was being “more sticky than previously expected” i.e. not transitory. The Bank sets out is current reasoning on Interest rate hikes here Why is inflation expected to fall during 2023?
@ Roland,
I doubt that Joe’s articles “will explain it for you”.
The idea is that “the money supply” needs to be reduced. However there is no general agreement in how to define it. If you Google the term in Wiki you see several possibilities: M0,M1,M2, …..MZN. So which one is it?
If we take the view that all money, in the sense of the issuing of net credits into the economy, originates from Government we can argue that an increase in interest rates is potentially inflationary because govt ends up paying out more into the economy to service its debt than it needs to.
Of course if govt increases interest rates to sufficiently high levels it will succeed in converting the very high level of private debt in the economy into a high level of bad private debt. Mortgage holders will simply not have enough money to pay. Businesses will fail. Workers will lose their jobs and so will be even less able to pay their debts. Create enough bad debt and the economy will crash. However this is not at all the same thing as regulating it. After a crash, a panic will set in. The govt then has no other choice but to try to pick up the pieces and to foot the bill to ensure the economy continues in at least some fashion.
Interest rates will then be rapidly reduced in a matter of weeks.
@peter – as you noted, the articles Joe linked, just showed just how far the economic establishment are in denial. The banks increasing interest rates do nothing for the “money supply”, it just forces more money to be accumulated by the banks…
As I’ve noted previously, if you drill into what constitutes “core inflation”, you will see it is a mixed basket, as for it excluding “energy and food”, it doesn’t take much thinking to understand it does include them, just not directly.
Yes we can expect the BoE charlatans to increase interest rates again, even though they can present no evidence the previous rises are working; yet there is plenty of evidence they are simply stoking inflation and increasing the likelihood of there being substantial business failures due to higher costs of debt servicing in 2024.
The reasons for the failure of The Silicon Valley Bank, a major global player in cashless payments for small businesses, is because it’s banking model does not fit the one-size-to-all concept of banks at the heart of current monetary economic belief. Should of been a wake up call to economists that their beliefs are fundamentally flawed…
The BofE MPC today increased bank rate to 5.25%. It is likely to stay at or about that level for the foreseeable future as long as it takes to bring inflation back to target.
That will have a direct impact on Mortgage holders around half of whom have already come off fixed rate mortgages with a further 3 million or so due to come off fixed rates over the next couple of years. The average increase in mortgage payments according to the resolution foundation is £3000 per year. That negative impact combined with the disastrous impact of Brexit on UK labour supply and inflation is likely to finish off any hope that this Conservative government has of being reelected next year. It will fall to the next Government to pick-up the pieces
The principle of a circular economy whereby one persons spending is anothers income applies equally to interest. The big increase in interest rates is boosting banks net interest margins. HSBC has used its bumper profits to pay a second interim dividend and buy back £2billion of shares this week BANKS HSBC net profit more than doubles in the first half, announces $2 billion share buyback
Banks earnings on mortgage loans should be subject to an additional Land Value Tax to aid in funding Housing benefit support and the temporary £3bn mortgage protection fund, proposed by Ed Davey, to help lower income homeowners who have seen a 10% increase in their mortgage repayments to adjust their finances.
Peter Martin 31st Jul ’23 – 4:34pm:
It doesn’t make any sense to try to apply a monetarist solution to a problem which had a fiscal origin.
Using Quantitive Easing to create £400 billion of new money in order to pay people to stay at home and not produce goods or services is very much a monetary origin. Money-supply economists, such as Professor Tim Congdon, correctly predicted the current cost of lockdown crisis…
‘Reckless US faces a reckoning’ [June 2020]:
https://thecritic.co.uk/issues/june-2020/reckless-us-faces-a-reckoning/
The cause and effect is clearly shown by the graphs in this article…
‘Tumbling Money Supply Alarms Economists Who Foresaw Inflation’ [April 2023]:
https://www.tbsnews.net/worldbiz/global-economy/inflation/tumbling-money-supply-alarms-economists-who-foresaw-inflation
@ Jeff,
Whether QE is a mainly a fiscal or monetary operation is an interesting question. It has elements of the latter in that it clearly has forced down interest rates, but it’s primary purpose was to create spending money for government both after the 2008 GFC and also during the Covid epidemic. So it has to be mainly fiscal.
It’s the spending in relation to a what is available for sale which has created the inflation. Not when the government was doing the spending you might have noticed, but later when those who were lucky enough to have accumulated savings during the lockdown started to do their own spending on goods and services which were in short supply.
Of course the monetarists often do get their knickers in a twist when they perceive the government to be “printing money”. Even though they should know that its all either been created in a computer or printed for as long as anyone can remember! So they start to predict hyperinflation and pile into the gold market creating a huge price spike as happened after the 2008 GFC. Of course if you got in quick and then out at the right time you’d have done OK, but a lot of gold-bugs got in slow and out at just the wrong time!
Yes there was some inflation but not the hyperinflation they were predicting on the basis of their faulty theory.
@Jeff – Misreading your sources I see.
The furlough scheme (ie. “Quantitive Easing … to pay people to stay at home and not produce goods or services”) cost the government £70bn. It was the total estimated cost of government Covid-19 measures (*) that was in the range £310 billion to £410 billion.
The furlough scheme was significantly cheaper than the QE approach adopted after the 2008 GFC, plus it kept money in the pockets of people who would spend it in the high st. rather than simply stash it in an off-shore account.
(*) These include investments made in vaccine development, PPE contracts etc.
Inflation properly stated is too much money chasing too few goods. The CPI measures only a sample of typical household goods and services and excludes items such as house price increases, mortgage payments and council tax. RPI includes mortgage interest payments. Considering house purchases are the largest purchase for most families RPI is a better indicator (13.7% annually to Jun)
House price inflation adds nothing to GDP and is effectively a redistribution of wealth from one generation to the next or from those that have been able to get on the housing ladder early enough and those who cannot.
When credit creation consistently exceeds the growth in GDP, as it has done over the past 25 years or so, the excess money has to go somewhere other than the purchase of goods and services. It goes into speculation in housing and the stock market and/or increased imports vs exports. That is what has brought us to this state of affairs with mortgages and unaffordable rents.
When the Japanese stock and housing markets collapsed in 1989 deflation set-in for 3 decades and a traditional system of secure jobs for life was replaced with a much more precarious employment market and lower wages to this day. That is the consequence of zero interest rates, quantitative easing and flawed monetary policy.
The fact remains that we are a very unequal society. However it is done transferring wealth from the wealthy to the poorer would release a large amount of money for essential cost of living and infrastructure issues. We must bite the bullet and show we care about everyone having a decent quality of life.
” Inflation properly stated is too much money chasing too few goods.”
Which hasn’t been the situation for a long time…
Funny how one economists supply and demand is another’s inflation…