Very few options to beat inflation crisis
Head of ACCA Wales Lloyd Powell on the impact of rampant inflation
THERE’S a garage near my house where I take the car to pump up the tyres. It used to cost 50p to do this. That’s just gone up to £1, and there couldn’t be a plainer example of rampant inflation.
Of course an extra 50p isn’t going to break the bank. But we’ve all seen the insidious effects of the hike in the cost of living every time we go to the supermarket, and especially when we get a fuel bill.
There’s a strong sense that we’re on a rocky road to a crisis in consumer spending and business confidence, and these issues were on the agenda at two recent events.
Last Friday, we hosted an event with the Bank of England, at which we heard from the chief economist of the Bank, Huw Pill, about the pressures being faced in the economy, the factors driving inflation and also recognising the challenges being faced by those most directly exposed to the cost-of-living crisis, via rising inflation and a squeeze on real incomes. Mr Pill outlined the actions being taken now, and in the future, by the Bank to respond to the current situation and to ensure a return towards the Bank’s 2% target, including consideration of UK Government bond sales.
At the inflation and cost-of-living event at Cardiff Business School earlier this month, Sarah Dickins, BBC Wales economics correspondent, and Prof Huw Dixon, head of economics at Cardiff Business School, led a thoughtful discussion on what this means for us now, and how events could develop.
Prof Dixon explained just how quickly and dramatically inflation has rocketed, from 0.7% in March 2021 up to 7.2% in March 2022 (and now to 9% according to the latest ONS figures), with 10% inflation predicted by the end of the year. And this isn’t just a UK phenomenon – the inflation rate is high in many other countries, and any economic slump is likely to be global in nature.
Mr Pill from the Bank and Ms Dickins and Prof Dixon described the perfect storm of elements that have led to this emergency.
First of all, the restart of economic activity after the pandemic placed an enormous strain on global supply chains. It clearly wasn’t and isn’t as easy as flicking a switch.
There have been labour shortages in economies everywhere, with the Great Resignation triggering an unprecedented shift of workers, dealing a big blow to businesses with labour-intensive processes and increasing wages.
The resurgence of Covid in parts of China, and its stringent lockdown policy to contain the spread, has also hampered production and strangled supply.
At the same time energy prices have leapt. That’s due in part to disrupted supplies and lower production globally.
But latterly, it’s another dire effect of Russia’s grotesque war with Ukraine. Sanctions on Russia have threatened fuel supplies to Europe, as nations look elsewhere for their energy supply.
The crippling of Ukraine’s economy by the invasion has also seen shortages and price rises of essential commodities like wheat and fertiliser.
That’s the macro picture.
But, of course, we see the microeconomic effects, the real flesh-andblood consequences of all this in our own communities.
The impact falls heaviest on poorer households who spend a greater proportion of their income on food and energy.
Wages are falling way behind inflation for many workers, and with a further contraction in the economy looking increasingly likely, it seems unlikely that pay will catch up any time soon. Although the unemployment rate is historically low, a fall in discretionary spending as families are forced to cut back is very likely to lead to job losses, as businesses are impacted by falling sales and increasing costs.
So much for the problem. What’s the solution?
As Prof Dixon outlined, the Westminster Government has a few options.
It could raise taxes on higher earners, on wealth, and collect windfall taxes on energy companies that are profiting from the rise in the price of fuel. The revenue could be distributed to the less well-off, in tax cuts, increased benefits, or in subsidies for fuel bills.
The Government could borrow more to fund support for businesses and less well-off, as inflation can make Government debt cheaper. But that could lead to increased demand and further inflation, as the main problem remains on the supply side.
The Welsh Government has limited powers to help people directly. It could raise taxes through LTT, but on the margins. Or it could redirect spending to benefit the poorest – but it already has extensive spending commitments on health and social services, education, the economy and climate change.
Wearing my ACCA hat, it’s important to emphasise that accountants can support their clients by advising on cashflow, accessing a range of finance, business strategy and planning and in claiming reliefs such as R&D credits.
In the longer term, an energy policy based on green solutions – wind, solar, tidal – has the potential to create an enormous industry which sustains high-skill, high-wage jobs and reduce our reliance on fossil fuels.
Wales has a head start in this sector, and there are lots of examples of brilliant businesses doing amazing things in this arena. There’s lots of imaginative work being done by private businesses and the Welsh and UK governments to encourage companies to invest in the local, green economy and enterprises dedicated to sustainability and low or no carbon emissions.
Just this week it was reported that the organisers of the popular Green Man festival are going to run a farm bought by the Welsh Government near Talybont-on-Usk, Powys.
It’s expected to employ about 175 people initially, focusing on sustainable farming, local food and climate change.
It’s the kind of enterprising and progressive thinking that can fuel healthy economic activity into the future. But it’s little consolation to families in the here and now who are faced with a grim choice between heating and eating.