Business Leader Magazine: Inflation

The Autumn Statement is being billed as Austerity Mark II – which it sort of is – but not for a while yet.  Jeremy Hunt hopes his plan will stabilise the economy and above all, will be an effective weapon to curb inflation. He’s right to prioritise this ambition – the trouble is, at what cost?

Inflation is not just the scourge of Britain. Food inflation is a particularly good barometer as it is mercilessly transparent and immediate. Margins in the food industry are already quite slim and the supply base has little room to manoeuvre, resulting in prices being passed on more readily and rapidly (to retailers and to consumers) than in many other sectors. 

Hardly a week goes by without staggering inflation figures emerging across a range of countries. In Germany, inflation has reached its highest level in thirty years. Food prices have risen 18.7% year on year. The US saw its consumer price index for food jump 11.2% in September, compared to a year ago. In Ireland, inflation rates hit record highs - up 12.4% with many staples increasing by 28%, year on year. This is eye-watering stuff.

Inflation is a destroyer. It destroys wealth. It destroys savings. And it destroys buying power. Possibly more importantly, it also destroys confidence, with many postponing expenditure or  investment decisions until more clarity (and therefore certainty) emerges. The smart money is on a “reasonably good” festive season – Covid robbed us all of being able to enjoy the last two to the extent which is normally possible. However, following that, reality is likely to kick in. Households with ballooning energy bills are likely to tighten their belts considerably. Then get ready for a wave of industrial agitation and strikes as workers find their room to manoeuvre extremely limited. 

However, this appears to be one of the few inflation-related silver linings at the moment. The UK government needs to be honest about the current and very likely continued reduction in UK national standards of living as a result of inflation. Clearly the Ukraine war and other global pressures are also contributing to this slippage of standards. But inflation is the one cause which has the most unsettling effect.

The former governor of the Bank of England, Mervyn King, recently said there were fundamentally three challenges facing the UK at the moment; high inflation, high national debt and the lamentable fact that the UK is "saving far too little". He believes the best way to tackle inflation is through "slow growth" and highlighted the folly of central banks the world over who "made the mistake during the lockdown period of thinking they should print lots of money" to support their economies while Covid was causing them to contract. The UK was clearly no exception to this.

He also warned that the UK could face a period that is "more difficult" than the period of austerity under former Chancellor George Osbourne. I wonder if Jeremy Hunt will like that comparison?!