No mood for co-operation
Calls for workers and businesses to tackle inflation by accepting less are doomed to fail in the new regime
Huw Pill, the chief economist of the Bank of England, never seemed to have much in common with Marie Antoinette. But his headline-grabbing comments this week that people must accept being worse off to beat inflation had more than a touch of “let them eat cake” about it.
In fact, like the ill-fated last queen of France, Pill is perhaps being a bit unfairly treated by the mob. Marie Antoinette almost certainly never said anything like the phrase that history has attributed to her. Pill came out with something loosely similar to his reported remarks in an interview, but his point seemed a bit more subtle than the front page of the Daily Mail suggests.
Businesses and workers are demanding higher prices and wages to try to offset the spike in energy costs, he said. For the inflation surge to end, “someone needs to accept that they’re worse off and stop trying to maintain their real spending power”. Right now, “what we’re facing now is that reluctance to accept that, yes, we’re all worse off, and we all have to take our share”.
A distinction without a difference
As comments go, it was a bit less clumsy than Andrew Bailey, the Bank’s governor, when he said last year that employees should “think and reflect” and show “quite clear restraint” before asking for wage rises. Bailey made a serious error in putting the onus on workers, rather than saying that businesses might need to accept lower profits. Pill seems to be implying that the pain should be shared. But in the scheme of things, that amounts to a distinction without a difference.
Nobody is any mood to heed calls for cooperation. Many workers have seen large declines in their real income over the past decade. The pandemic has changed the labour market and their bargaining power; they aren’t going to pass up the chance to make up lost ground. Conversely, businesses aim to maintain profits. Some critics have described attempts to raise prices and boost margins as “greedflation”, but making what you can while you can is a rational response to rising uncertainty. If the UK is especially vulnerable to these forces, that’s no surprise. Many years of incompetent government is now creating a growing sense of “everyone for themselves”.
This kind of mindset is important: it makes it hard to see how we go back to the conditions that prevailed before the pandemic. Investors need to think differently in this new regime. The pressures won’t be over soon. The chance for reliable shortterm gains may be limited. Hence the priority is investments that are likely to hold their long-term value, such as real assets, or stocks with pricing power rather than rapid growth prospects.
“Hold real assets and stocks with pricing power”