Inflation isn’t out of control yet, governor, but can you reassure us it won’t be?July 18, 2021
The Bank of England’s Andrew Bailey needs to say what he will do if the rate of price increases – already 2.5% – remains high
The UK’s annual rate of consumer price inflation was 2.5% in June, we learned last week, up from just 0.7% in March. It has arrived at that point sooner than almost every economist had expected in the spring. Now the forecasters agree 3% is a nailed-on certainty this year, with a few saying 4% will be seen.
There is a strong sense of the economy changing quickly. You can see it in the volume of transactions that have driven house prices up by 10% in the year to May, and in reports of staff shortages from pubs, restaurants, haulage companies and housebuilders.
Some of the inflation was inevitable, and some is easily explained. Consumers were bound to spend more freely after lockdown and no one can be surprised that companies are trying to catch up on lost trade, including by pushing up prices. The whoosh in the housing market is partly down to the rush to beat the return of stamp duty. And blockages in global supply chains, particularly for computer chips for new vehicles, have contributed to a surge in prices of secondhand cars.
But there is a challenge here for the Bank of England: what’s the plan if the comfortable theory that higher prices are merely “transitory” starts to fray? What if inflation strays a long way from the 2% target and threatens to remain elevated?
The stakes are higher than in the past because the make-up of the UK’s borrowings has been transformed after 11 years of quantitative easing (QE), the process whereby the Bank creates money by buying government and corporate bonds. The profile of the debt is now more short-term, meaning the effect on debt-servicing costs of any rise in interest rates is magnified. “It used to be the case that governments could inflate their debt away. It is less and less the case as we go into the future,” said Richard Hughes, chair of the Office for Budget Responsibility, recently.
Meanwhile, QE is in the spotlight after a blistering report last week by a House of Lords committee saying the Bank had become “addicted” to the policy – a notable intervention from a panel whose members include former Bank governor Lord King, who introduced QE in 2009.
The argument is that QE has not only widened inequality by boosting asset prices, but has also become a default tool. The Bank committed to buying £450bn of government bonds at the start of the pandemic. “If perceptions continue to grow that the Bank is using QE mainly to finance the government’s spending priorities, it could lose credibility, destroying its ability to control inflation and maintain financial stability,” said the report.
There are strong counter-arguments, of course. QE and other measures lowered borrowing costs in the past 18 months and provided “much-needed support at a time of extreme economic stress”, said Threadneedle Street. There are also powerful incentives not to tighten monetary policy too soon. The furlough scheme ends entirely in September, creating tighter conditions in effect for some of the most hard-hit sectors.
Yet the risk in ignoring the drip-drip of higher inflation is a panicked reaction at a later date. “An ounce of inflation prevention is worth a pound of cure,” Andrew Haldane wrote before he departed as the Bank’s chief economist. Two current members of the Bank’s monetary policy committee, which sets interest rates – Michael Saunders and Sir Dave Ramsden – hinted last week at the need to take action sooner than thought. The debate is alive and the outside world wants clarity.
Andrew Bailey, the Bank of England’s governor, has already created confusion by saying government bonds could be sold back to the market before interest rates are raised significantly, reversing the previous signal. The Bank’s next quarterly inflation report is due next month. It would be a good moment to say when, and how, the Bank would act. Confidence that inflation will subside is one thing; the critical part is what happens if it doesn’t.
Even its freedom plan is making the government unpopular
When no one’s happy with your decisions, you’re either doing something very right or very wrong.
Not many business leaders have offered a glowing review of the government’s workplace guidance on how to keep customers and staff safe from Covid-19 after 19 July, when measures such as mask-wearing will no longer be compulsory in England.
Unions point out that employers who continue to request that customers wear masks will be exposing staff to abuse from angry patrons who may feel that now the law has changed, so should the way they go about their daily lives.
Waterstones has taken the safety-first approach and will still require masks to be worn, as will Transport for London. Others, such as Sainsbury’s and the holiday chain Center Parcs, will strongly advise it.
Hospitality groups have welcomed the loosening of profit-crimping restrictions but are largely scornful of the idea that the government is “encouraging” them to promote mask-wearing. Some 80% of nightclubs, which have been closed for 18 months, say they have no intention of endangering the party vibe by doing anything of the sort.
At the other end of the spectrum, the shopworkers’ union Usdaw has warned that retail staff, many of whom are young people who have not had two vaccine doses yet, are now being placed at risk.
Ministers, said shadow business secretary Ed Miliband, were using flimsy guidelines to offload responsibility onto hard-pressed firms.
Lurking in the background of the chaos is yet more chaos, in the shape of the “pingdemic”, where hundreds of thousands of workers are being alerted by the NHS Covid-19 app and told to isolate, risking the shutdown of large sectors of the economy.
About the only people likely to be gleeful about the new guidelines are businesses who make or sell carbon dioxide monitors. In the absence of social distancing and masks, the guidance shifts the emphasis towards airflow. CO2 levels are seen as a good proxy for ventilation.
The government may soon find that the air flowing in its direction becomes rather more heated.
Big music labels are the only ones singing a happy tune in streaming era
The damning report into the machinations of the music industry published by MPs last week has shattered the myth that the rise of streaming has ushered in a new democratic era in which artists and record labels benefit equally as the royalties roll in.
The 121-page report into the economics of streaming by the Department for Digital, Culture, Media and Sport committee of MPs was scathing in its assessment: artists make “pitiful” returns from one-sided royalty deals. Power wielded by the major record labels (Universal Music, Sony Music and Warner Music) should be investigated by the UK competition watchdog.
The music industry has bounced back from life-threatening digital piracy a decade ago. Global revenues hit $21.6bn last year, the highest since 2002 and the sixth consecutive year of growth. But business practices remain stuck in the past.
The committee heard shocking testimony of iniquity in the system. Nadine Shah, the 34-year-old Mercury prize-nominated artist with four successful albums, said that she could not pay her rent on the amount in royalties she received from streaming.
Record labels in the UK made £1.1bn in 2019, whereas it can take more than a million streams for an artist to make £1,000, meaning that only megastars such as Taylor Swift or Ed Sheeran are benefiting from the streaming revolution.
Meanwhile, Warner Music’s share price has risen by a fifth in the last year, giving it a market value of $18.5bn – owner Sir Leonard Blavatnik bought it for $3.3bn in 2011. And Universal, the world’s biggest music company, is set to float in Amsterdam in September with a valuation in excess of €35bn.
The committee has recommended a new system of payment to boost income for artists – equitable remuneration. However, many in the industry argue that it will not work as intended. For musicians, the streaming boom continues to fall on deaf ears.
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