Issue 292: 2021 09 09: Stagflation?

9 September 2021


Not so nice.

By Robert Kilconner

Those of us who lived through the 1970s will remember the destabilising force of inflation: 24% in 1975, 18% in 1980.  An economy in which savings became worth little and goods and services became unaffordable.  An out-of-control state of affairs until the radical policies of Margaret Thatcher reigned back the forces undermining the currency.  It wasn’t as though inflation was matched by a corresponding growth, either.  “Stagflation”, that was the term on everybody’s lips and it was every bit as unpleasant as it sounded.

It all seems a long time ago.  In recent times inflation has lagged the 2% target seen as the right level to promote economic growth without penalising savers.  How to get the rate up a little?  That has been the challenge for the central bankers; but now the music is beginning to change.  Increasingly economists express concerns about inflationary pressure, and although many think that they are unduly alarmist, those who predicted a pandemic or the immediate fall of the Afghan government were regarded as alarmist too.

This column does not have the economic clout to predict international inflation levels but there are one or two points that can be made about the position of the UK.  In particular, the impact of the likely increase in labour costs.

Those readers who are keen shoppers will have seen empty spaces on the shelves of their favourite supermarkets recently.  Is that because of an upsurge in shoplifting?  Have the clothes moths which are now such a menace developed an appetite for certain forms of supermarket food?  No, it is neither of those things.  The problem is with delivery drivers, or rather the lack of them.  Also, no doubt, people who stack shelves or are otherwise involved in getting food and other merchandise into the hands of the consumer.

Currently the Government is applying a squeeze.  By restricting the use of cheap overseas labour it is seeking to minimise unemployment.  “Let the Brits have the jobs,” it says.  Logically that seems sound enough and perhaps it will eventually prove to be so, but for the moment jobs appear to be going unfilled and demand for labour is increasing accordingly.  Sometimes that is because of a lack of qualified people.  Drivers of heavy lorries, of whom there is a considerable shortage, need to have training and to hold a licence to drive a heavy goods vehicle.  Such licences are expensive and time-consuming to obtain.  In other cases it seems that the home labour force may be reluctant to take jobs which seem attractive to immigrants from Eastern Europe.  No doubt there are many other causes but the fact remains that if you look across the labour intensive industries from fruit picking to hospitality or transport, you will find that one way or another employers are having difficulties in filling vacancies.

It is a commonplace that a shortage of supply pushes prices up and it must follow that wages in large sectors of the UK economy are set to rise.  That is not necessarily a bad thing in itself but there must be a risk of a loop developing under which increased wages push up prices, increased prices force down the standards of living and this itself becomes a driver for even higher wages.  Result: instability for all and no increase in living standards.  Not so good.

So how can it be avoided?  Presumably by increased mechanisation so that the labour expended in each unit of production begins to fall.  It should not matter if distribution becomes more expensive if there is a corresponding efficiency saving.  All that one would see would be an upward movement in pay scales and fewer people working, desirable if the surplus workers can be used for productive purposes elsewhere.

Increased efficiency, however, does not arise spontaneously.  It has to be generated.  That means investment in new plant and machinery and the exploiting of new technologies.  It is a matter of some pride in the UK that we kept unemployment so low during the financial crisis at the end of the first decade of this century.  There were wage restraint, job sharing, postponement of mechanisation and lots of other things besides, which cut labour costs.  The result was to keep unemployment down but it came at the price of reduced productivity.  That may have been an acceptable balance at the time but now life is moving on.  Increased productivity is the only way of avoiding an inflationary spiral and now it needs to take precedence over short-term job figures.

We are lucky enough to live in an age of unprecedented scientific advance.  The vaccine programme has shown how science can be used to solve problems and the challenge must be to harness it to the cause of increased productivity.  If that can be done living standards may increase without prices getting out of control.  If it cannot, well, “stagflation” here we come.



tile image: Colin Watts on Unsplash

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