It’s the poor who will pay the price of soaring inflation
UK inflation is now expected to hit 3 per cent this year, above the Bank of England’s target of 2 per cent, and yet interest rates are still being kept at near zero. It is criminal to ignore such rapidly rising prices that will make older generations suffer while City fat cats get rich on historically low rates.
As our economy picks up after lockdown, it’s plain to see that daily costs are rising fast. Due to the Covid-19 disruption of supply lines, raw materials are costing more and that is being fed into prices of everyday goods. On top of that, a shortage of available staff, thanks in part to many workers still being on furlough rather than joining the work force, means wages are rising too. All those costs are now being passed on to the consumer.
“The rate of input cost inflation accelerated for the fifth month running and was the joint fastest on record,” says IHS Markit, a purchasing managers’ news service.At the same time, across the Atlantic, US inflation has surged to 3.9 per cent, according to the Bureau of Economic Affairs, thanks to massive government spending.
ALL this is very worrying news for older generations who live on a fixed income and hope to eke out their savings over their later years. Inflation is a destroyer of money accumulated over a lifetime and especially hits the cautious saver who does not want to risk their money by investing in shares or more hazardous speculation.
It is therefore shocking, if not outright negligent, that the Bank of England does not appear to be taking this inflationary risk more seriously. Not one of their Monetary Policy Committee (MPC) argued the case for raising interest rates above 0.1 per cent last week, and instead carried on pumping more money into the economy, making a grand total of £895billion spent on so-called quantitative easing.
For older, more cautious observers the Bank of England’s attitude seems reckless considering the economy is actually recovering well after lockdown.
The original dramatic cut in interest rates came after the 2008-9 financial crisis and was meant to be temporary. But over a decade later historically low interest rates are still with us and, with only a small margin to work with, were cut to near zero during the pandemic.
The catastrophic result of this extended period of absurdly low interest rates was to see investors taking their money out of banks and pouring it into other assets, principally property. That meant the average house price has rocketed over the last decade putting homeownership beyond many young people. This has been bad news for social mobility as buying a home used to be the best path to getting on in life.
Margaret Thatcher knew that and would be askance at how her dream of widespread property-ownership has been squandered by a misguided economic policy overseen by Conservative governments.
MRS Thatcher was voted into power by promising an end to runaway inflation and yet this current Tory administration seems to be relaxed about rising prices and diminishing savings. Even its long-term zero carbon plans are inflationary.
“If I had to put my money on a single factor that was going to push up costs in the years to come” says inflation expert Roger Bootle, “I would say it was the environmental emphasis
and in particular the drive towards net-zero. This is going to lead to a whole series of costs and price increases.”
Higher home energy, transport and food costs being the most obvious.
The only winners from inflation are wealthy investors whose property portfolios have swollen in value thanks to low borrowing costs and, of course, government. Having borrowed billions of pounds to battle Covid-19, politicians across the Western world would welcome a dose of inflation to whittle away at their national debts.
As the rich get richer, it’s the more humble, older generations who will pay the price.
It’s vital that Chancellor Rishi Sunak urges the Bank of England to take more preemptive action by gently raising interest rates.
He should not be tempted to raid pensions to refill his vaults. The triple-lock state pension must be maintained as that will be one of the few ways older people can be protected against this damaging spiral in day-today costs. It is designed to keep pace with inflation and should be an incentive for government to keep a lid on rising prices.
Once inflation takes grip, it will be politicians who face the wrath of voters angry at the mismanagement of our finances.
‘Older generations suffer while City fat cats get rich on low rates’