Next month brings the likelihood of a 0.25% interest rate rise from the Bank of England, and possibly two more over the rest of the year, as Threadneedle Street seeks to dampen Britain’s overheating economy.
At least that would be the reason if the economy were overheating and in need of higher interest rates. In fact, the central bank is simply revealing itself to be weaker than it was in 2011, when inflation jumped to 5% and investors, fearful of runaway prices encouraging workers to demand sky-high wages, demanded action. Interest rates then remained at historic lows.
The logic of the position the Bank took last year – that inflation would be temporary and externally driven, and for that reason beyond its influence – was reminiscent of 2011. And given the underlying weakness of the economy, that same logic still applies.
Of course, inflation is a problem for households that are facing higher food and utility bills, and especially poorer households which have mostly missed out on working from home. They haven’t saved large sums during the pandemic. To solve that problem, why not reinstate last September’s cut to universal credit? Its removal amounted to a loss of about £1,000 a year, and the money would easily make up for the intangible costs of Covid as well as the more tangible gas bill rise. Meanwhile, the better-off can afford higher prices.
The Bank is only concerned by the average worker’s response to inflation and whether it will be characterised by rocketing wage demands – driving incomes higher this year and next. There is little evidence for this, and it seems implausible when so many businesses have successfully driven wedges between their workers, denying them any possible collective action.
What about sky-high vacancy rates? Weren’t they supposed to force almost all employers, including those that shunned unions, to pay megabucks – protecting workers against inflation and maybe offering a bit more on top?
On this point, the Resolution Foundation has pulled together the latest data from the ONS surveys of online job adverts. In October, transport and logistics firms were looking for about 350,000 workers. By 6 January this had fallen to 200,000.
Similar drops in demand were seen in catering and hospitality and construction, knocking another 150,000 off the 1.1m vacancy total.
It’s true Omicron played a large part in the decisions employers made about needing extra staff over the festive period. Yet there was also something more fundamental going on, as the foundation’s director, Torsten Bell, says in an accompanying analysis, arguing that a messy reopening of the economy was always going to cause temporary jobs mismatches, adding that over time “capitalism is quite well set up to adjust to shifts in demand”.
How else is the economy overheating? The focus is on the latest GDP figure, which shows the economy surpassed its pre-pandemic level in November and, after an Omicron dip that will mar December and January’s figures, looks like picking up again once working from home comes to an end in February.
You would think the Bank would look a little deeper into why the British economy has grown, rather than just at the top line, because it is far from being a straightforward story of success, or “a testament to the grit and determination of the British people”, as the chancellor would have it.
Much of it is due to the massive increase in health spending over the past two years that countries with larger and better-funded healthcare systems – France and Germany, for instance – had less need for. The construction of a Nightingale hospital feeds into GDP, as does the mothballing and deconstruction of the same shed and beds. It makes no difference to the statisticians that the temporary hospital went unused.
Consumers have played a significant part in the recovery while businesses have largely kept their powder dry, holding back on investment until the outlook is clearer. But without business investment, recoveries usually lack the impetus needed to sustain them and quickly tail off.
Then there are the tax rises in April that will hit employers and households – mainly the 1.25% national insurance increase, but also the freeze on income tax thresholds.
The one dissenting voice on the Bank’s monetary policy committee is Silvana Tenreyro, a former professor at the London School of Economics. She argues higher prices and tax increases will have their own dampening effect without the need for the committee to change course. She makes a good point.
Read More: Another interest rate looms, but Britain doesn’t need this one either | Phillip Inman