Easter economics — inflation stagflation | Chris Davies

What goes up must come down apparently but not for a while at least in the case of inflation and it’s nasty cousin, stagflation. The latest economic metrics make for grim reading. Despite the slew of “good news” from the government last week, this week has been politically bruising. 

The cost of living crisis is temporarily pushing millions of people into the “heat or eat” dilemma. Mercifully, the weather is relatively mild and the problem will hopefully be deferred at least until the autumn, when a further hike in the energy price cap of around £800, taking average bills to around £2,800 per year, is all but baked in, unless there is a substantial dip in wholesale energy prices. 

As for the here and now, the numbers are politically sub optimal for a government that is fighting relatively toothless opposition but is being sniped at daily by the mainstream media over everything from Partygate to conviction for sexual assault to green cards at Number 11. 

The most telling number will come on 5th May in the local elections. Prior to the Fixed Penalty Notices for Messrs Johnson and Sunak, I expected the Tories to lose between 750 and 1,000 seats. That has now suffered from inflation and 1,000 to 1,250 instinctively seems more likely.

Let’s get into the data.

Consumer Price Index (“CPI”) Inflation

The relentless rise continues. 6.2% in February, 7% in March. As energy price rises take effect from 1st April, that is not priced in. It is only a matter of how much rather than whether it will increase again in April. My expectation is 8+% (the April data will be published 18th May).

Given CPI excludes house price inflation, I estimate “real inflation” (upon which I am writing a research piece) is running at around 1% to 1.25% per month so around 12.7% to 16.1%. 

Retail Price Index (“RPI”) Inflation

8.2% in February, 9% in March. Although it suits the government for the media not to focus on RPI, index linked increases that relate to this index include broadband, mobile phone charges and student loan interest (which has been pegged at RPI + 3%).

And what of house prices? House price inflation is at 10.9% across the UK and breaks down as:

• England 10.7%;

• Northern Ireland 7.9%

• Scotland 11.7%

• Wales 14.2%

I expect RPI to hit 10% in April (the April data will be published 18th May).

Wage inflation 

Let’s start with the good news. Wage inflation increased to 4% excluding bonuses. Unfortunately whether benchmarked against CPI or RPI, the gap between prices and earnings has widened again.

With the National Insurance increase taking effect from 6th April (the threshold before it applies does not start until 6th July) and the freezing of Personal Allowances for income tax, net disposable income is falling for everyone, from those on benefits, to pensioners to public and private sector workers.

The pound in your pocket is worth less this month than last and will be worth even less next month than this. That is beyond disheartening. 

I don’t agree with self styled “Money Saving Expert”, Martin Lewis on much, which I’m sure won’t keep him awake at night but his comments about the potential for civil unrest not being far away struck a chord with me. I fear he may be right and sincerely hope he is not.

Stagflation 

Now entrenched in our economy and forecasted to appear in economic data analyses through to the end of 2023/24 fiscal year, stagflation occurs when economic growth falls below the rate of inflation.

The Office for Budget Responsibility (“OBR”) is about as accurate with its forecasting as the current Conservative & Unionist Party is misnomered.

A “low tax” Chancellor who raises taxes every year of this parliament is not conservatism. As for Unionism, try telling the Unionist community in Northern Ireland that the Tories believe in the Union, having allowed the EU to annex the country as a satellite and hobbled trade to and from Great Britain. The only winners in this scenario will be Sinn Féin.

Back to stagflation. In March, the economy grew by just 0.1%. This is net of the cost of NHS Test and Trace and the vaccine programme, without which it would have been 1.0%. 

I was forcibly reminded of this fact by a Borisphile but pointed out that these things both happened. It is salient to remember that government spending has to come from either taxation or borrowing. Debt servicing costs in 2023/24 alone are forecast to be £83Bn. Or should we just write those off to because it is financially inconvenient? No, we shouldn’t.

The OBR forecast for economic growth for 2022/23 is 3.8%. 

In 2023/24, it is below 2%. 

The OBR do not anticipate inflation coming back below 2% before the end of 2023/24.

In short, the economy will grow less quickly than inflation making the country as a whole worse off. For the next 2 years. Let that sink in.

Unemployment

Unemployment fell again to 3.8% in March. This is good news. There are 1.29M vacancies in the economy, of which just under 19% are in Construction and 13% in hospitality. This is also good news.

This is the one relative bright spot amongst the headline figures.

Less good news is that 76,000 people became economically inactive (principally due to retirement, caring for family or long term ill health) between January and March. 

Interest Rates

Last published 17th March, the current base rate is 0.75% per annum, up 650% on November 2021.

The next pronouncement from the Bank of England’s Monetary Policy Committee (“MPC”) coincides with local election polling day: 5th May.

The MPC signalled in March that future increases would be smaller and less frequent. The last thing the economy needs is an increase in mortgage arrears, further eroding consumer confidence and repossessions.

So what would I do?

I urge the government to think long and hard about the course they have set the country on economically. Instead of increasing taxation, it should be reducing. This would not only increase tax revenues but also drive economic growth upwards and eliminate stagflation within 12 months.

There also needs to be a complete overhaul of wasteful government spending with no sacred cows.

Will they listen? Probably not but let’s see what May 5th brings.

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