youBank of England chief economist Huw Pill drew derision this week when he said inflation means Britons must accept that “we are all worse off and we all have to do our share.” Echoing comments made last year by Bank Governor Andrew Bailey about the need for wage “moderation”, Pill claimed that the “passing the package game” of wage and price increases was “creating inflation”.
I disagree: Both are almost completely wrong, and the bungled message reflects the failure of conventional thinking and policy to address the cost of living crisis.
Public anger over Pill’s comments is understandable. The standard of living for most people in Britain today is being crushed by rising prices, with headline inflation running at 10.1%, well above the rise in wages and salaries of just 5, 9%. Worse yet, the rise is being driven by the skyrocketing cost of unavoidable essentials, most notably energy and food.
Those price increases in food and energy have been happening all over the world, and this fact contains the only grain of truth in Pill’s comments. Households and businesses in Britain collectively import half of the natural gas they consume and almost half of their food. When world prices for both rise, those imports cost more and the country as a whole becomes collectively poorer.
Where Pill, Bailey and the Bank have been wrong over the last 18 months is the idea that these price increases, internationally, should be covered by raising interest rates in Britain.
The thought is cruel. Pill made this clear in an earlier interview when he said the Bank’s rate-setting monetary policy committee wanted to see higher unemployment to “assure them” that inflation was under control. Interest rate increases are supposed to accelerate spending in the economy, which increases unemployment. The threat of higher unemployment, in turn, is supposed to discourage workers from making higher wage demands, which (the theory goes) reduces the pressure for higher prices. Interest rate hikes are a disciplinary device for work.
The pill implied that workers demanding higher wages and companies raising prices were just as bad. But the Bank’s main tool for trying to fight inflation only works one way: by attacking workers.
However, profits, not wages and salaries, are the main culprits here. Globally, companies producing essential items have done very well thanks to sky-high prices. The record profits of fossil fuel companies are notorious. But research by the Unite union has shown that the profits of the world’s four largest agribusinesses, lesser-known names like Cargill and ADM, rose 255% between 2019 and 2021.
Those sky-high prices have then been fed up the supply chain into internal speculation. The UK’s big three supermarkets, Asda, Tesco and Sainsbury’s, doubled their profits over the same period. The eight largest UK food manufacturers saw their profits rise by 21%. Economists Isabella Weber and Evan Wasner spelled out the mechanism at work in a new paper, showing how scarcity can give producers the power to drive price increases.
This situation is likely to get worse. While some of the immediate triggers for inflation are unique, such as the Covid lockdowns and the war in Ukraine, increasingly many are not. Climate and nature crises are eating away at our global food production systems. Climate change means more frequent extreme weather events, including torrential rains that damaged grain crops in India last month. These impose more frequent shocks to the system, which then translate into scarcity, price increases and skyrocketing profits for large producers, who can exercise their market power.
Workers are not to blame for the rise in prices and interest rates will not serve to contain inflation. The interest rate in London will not affect the price of gas in Qatar. It will not end Vladimir Putin’s invasion of Ukraine. You can’t grow any more tomatoes in Morocco. If it has any disciplinary effect on workers, it is clearly excessive: with wage increases well below the rate of inflation, it is clearly not the wage increases that drive inflation. In reality, we are on the wrong end of a deadly combination of global instability, expected to worsen with the climate crisis, and corporate structures that translate this instability into super-profits for a few.
As my co-authors and I argue in a new book, addressing this requires a review of existing policy. First, the Bank must get out of the way: stop and reverse counterproductive interest rate hikes; end the pretense that the Bank can do much about inflation and instead focus on financial stability.
Second, wage and salary increases must match or beat the rate of inflation, including for public sector workers.
Third, having accepted the principle of controlling household energy prices, the government could extend the same approach to other essential products, perhaps selected staple foods.
Finally, in the longer term, the essential production systems of modern life, food and energy, need public investment and an industrial strategy to eliminate speculation and build localized and sustainable production better adapted to an unstable world.