Will there be runaway inflation next year? Not if wages don’t increase | Economy


There is always an economist somewhere worried about inflation. As we head into Christmas with inflation falling to zero – it dropped to 0.3% in November – you might think they were mostly keeping their advice.

Not even a little. Inflation fears are spreading their grim message of imminent price hikes as the economy uncontrollably overheats after Covid, post Brexit.

Overheat? This certainly cannot be right when the economy is on track to be around 10% smaller at the end of the year than it was at the start, and the official Treasury forecaster, the Bureau of fiscal responsibility, does not expect to return to its former peak until the end of 2022.

An economic growth rate of 5.5% in 2021 and 6.6% in 2022 is the OBR forecast and is the benchmark against which all Treasury decisions are made. This rate of growth may seem electrifying compared to the previous 1% to 2% annual expansion seen over the past 10 years, but it is only catching up and nothing more.

In the city, many analysts see it differently. They fear that the New Year will bring such joy, mainly thanks to widespread and successful vaccination programs, that Western economies will come back to life this summer. This supercharged recovery is something that developed economies could face if industrial companies were ready and willing to match additional demand with additional output to keep the balance between supply and demand.

Unlikely, say the inflation hawks. Brexit uncertainty, which has killed any growth in business investment over the past four years, has combined with Covid-19 to hit UK manufacturers and producers hard. Expanding production won’t be easy if much of the kit used to make things is worn out and needs overhaul. The laid-off workers will be displaced and will not yet be ready or able to join industries that are benefiting from a rebound in activity.

This means, they say, that a return to some form of new normal will lead to such an increase in demand for goods and services that businesses, faced with a relative scarcity of goods to sell, will only be able to react. driving up prices.

To make matters worse, central bank funds from their £ 1 trillion quantitative easing programs, of which the Bank of England has provided £ 875 billion, will spur the trend. Funds that have not yet been loaned to the corporate sector – and billions of pounds of central bank funds are in the coffers of commercial banks – will be blown away in the form of very cheap loans.

The UK mortgage market, which was initially bolstered by Rishi Sunak’s temporary stamp duty cut and now struggles as he refuses to hold it beyond April next year, will see itself grant additional legs without the help of a government grant. Consumers, desperate to cheer themselves up, will join the borrowing frenzy, further increasing the pressure on prices.

Without controls on the disbursement of central bank funds via higher interest rates, an overheated economy could see what, in modern terms, would be hyperinflation of 10% or more, the hawks say.

David Owen, chief European economist at City Jefferies, said last week that this scenario could see the Bank cut rates early in 2021 into negative territory, to deal with the fallout from Brexit, to raise them further. late in the year, to prevent overheating.

Some of that thinking seems to have filtered out to the public, as the most recent Bank of England Attitudes Study reveals, which shows people expect inflation to jump next year at 3.8%.

It is true that there was an increase in inflation following the 2008 financial crisis, when it reached 5% in 2011, but it was short-lived.

And that’s because the economy in the aftermath of the financial crash was full of nervous consumers, most of them stuck on the same pay – or worse – they enjoyed before 2008.

Without a pay rise there can be no boom, at least no lasting boom. The government says it will not pay public sector workers more than 1% next year to be fair to private sector workers who have seen their wages drop.

Maybe private sector wages will go up. It’s possible. But even if this unlikely event were to take place next year, it’s – like the OBR prediction for GDP – a matter of catching up.

Even when unemployment was at its lowest level in 40 years in 2019, most of the wage increase came from increasing the minimum wage. This is obviously welcome, but it shows that employers have no desire or urgency to improve the standard of living of their workers without being forced to do so. And this inflation is not a threat.


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