Inflation: who gains, who loses?

BoE signals tightening of monetary policy to combat inflation. Andrew Bailey, the governor of the Bank of England, has said that the Bank “will have to act” to curb inflationary pressure in the medium term. Financial markets have already ‘priced in’ an interest rate rise before the end of the year.

Inflation caused by rising energy prices and supply/labour shortages. Bailey said he continued to believe that the recent increase in inflation was temporary, but the major increase in energy prices, along with supply chain and labour shortages, would continue for some time, and there was a danger of inflationary expectations beginning to take hold. Such expectations could fuel wage demands and thereby an inflationary spiral.

Who loses out from inflation? The Economic Policy Institute’s Josh Bivens explains why the debate about inflation and the appropriate policy response must take into account the sources of inflationary pressure. Inflation driven by commodity price rises or other transitory causes should not be met with contractionary macroeconomic policy responses. Bivens explains that the distributional impacts of inflation are not always bad, as “unexpected inflation tends to transfer wealth from lenders to debtors”.

Effect on owners of wealth. Economist Mark Blyth explained why inflation “worries the right so much”, because it “threatens to either reduce their expected investment returns, or impact their leveraged financial strategies, as interest rates rise”. The Resolution Foundation explains that, when inflation reduces the value of loans and assets held in nominal amounts, this “effectively redistributes net wealth from savers towards borrowers”.
Consumption of specific baskets of goods. Economist J.W. Mason explains that rising inflation may not necessarily lead to general reduced purchasing power (or falling real wages) because people from different income groups consume different things. He notes that “the stuff that has increased in price most over the past year is disproportionately consumed by higher-income families”.
Alternative measures of inflation. NEF’s Real Britain Index was an attempt to provide an alternative measure to the CPI to calculate inflation for those specifically on lower incomes. The ONS has since taken up this idea to provide different measures of inflation for different income deciles.
Wage-price spirals. As this executive summary of a book on wage-led growth from the ILO explains, inflation driven by wage increases may lead to improvements in productivity and thereby improve GDP growth, reducing inflationary pressure as the productive capacity of the economy is increased (full book here). This has led some economists, such as James Meadway, to argue that “wage rises and mild inflation, after decades of stagnant real pay and deflationary pressure, would be no bad thing.”

Cost of living crisis. In a Twitter thread, the New Statesman’s George Eaton notes that, even if wages are rising in some specific sectors, millions of people are facing cuts to Universal Credit, all workers will have to pay more in National Insurance contributions and 2.6 million public sector workers have had their pay frozen, meaning a cut in real terms.

Energy prices. J W Mason (above) notes that energy price rises hurt poorer households the most, since energy makes up a larger share of consumption for lower-income families. The Resolution Foundation’s new briefing explains “how rising energy costs will impact more than others and what the Government can do about it” reinstating the £20 per week Universal Credit Uplift, increasing energy related benefits (like the Warm Homes Discount, Cold Weather Payments and Winter Fuel Payment schemes) and reducing demand by improving the energy efficiency of homes.
Food prices. Bloomberg notes that global food prices are at their highest level in 60 years and explores possible policy responses.
Inflation policy alternatives. For more on balanced policy responses to rising inflation, see our previous Digest.

Weekly Updates

Climate change

2021 World Energy Outlook. The International Energy Agency published its 2021 World Energy Outlook. It warns that “for all the advances being made by renewables and electric mobility, 2021 is seeing a large rebound in coal and oil use. Largely for this reason, it is also seeing the second-largest annual increase in CO2 emissions in history. Public spending on sustainable energy in economic recovery packages has only mobilised around one-third of the investment required to jolt the energy system onto a new set of rails.” Making for the first time a 1.5C-compatible energy scenario its benchmark for the future, the IEA calls for “massive” public investment in clean electricity and energy efficiency. (Twitter thread summaries from the IEA’s Fatih Birol and Carbon Brief’s Simon Evans.) The report was welcomed by Oil Change International and analysed by Carbon Brief.

“Adapt or die”. The Environment Agency has warned government, businesses and society to “embrace and invest in adaptation rather than living with the costs of inaction”. In a report to government, the Agency pointed to the impacts of more extreme weather from increased rainfall and flooding in the UK in a 2 degree warming trajectory.

Priority areas and the case for early action. The Climate Change Committee’s 3rd Independent Assessment of UK Climate Risk from earlier this year highlighted 61 impacts of climate change and identified 34 as requiring urgent attention, from food security to public health, energy generation, international violent conflict and more (short video summary). In short: “Adaptation action has failed to keep pace with the worsening reality of climate risk. The UK has the capacity and the resources to respond effectively to these risks, but it has not yet done so. Acting now will be cheaper than waiting to deal with the consequences.”

‘Keep 1.5C Alive’ with green transition plans for finance and big business. Shadow Business Secretary Ed Miliband outlined a list of “five demands of the Government to ‘keep 1.5C alive’”, including the “game-changing” demand for banks, asset managers, pension funds, insurers and FTSE 100 companies to “develop and implement credible transition plans that align with the 1.5°C goal of the Paris Agreement across their portfolios by 2023.”

Rising gas prices and renewables. In the New Statesman Will Dunn interviewed Greg Jackson, CEO of the energy company Octopus, who argues that “Britain’s failure to invest in renewables led us into the gas crisis”.

Public services

Nationalisation of South Eastern Rail. South Eastern Railway was brought back into public ownership last week, the latest in a rail franchise to be taken over by the government as an ‘Operator of Last Resort’. Transport Secretary Grant Shapps said the Operator of Last Resort would take ownership to “protect taxpayers interests”.

The case for greater public ownership. We Own It explained how bringing the whole British Rail network into public ownership would lower fares and enable greater investment. CLES’s Tom Lloyd Goodwin outlined a series of alternative ownership models for how our railways should be run in ways which would end the extraction of taxpayer subsidised profits by shareholders, restore public values and advance social justice, and more.

Invest in childcare to boost women’s earnings. The Centre for Progressive Policy published Women in the labour market, making the case for investment in subsidised childcare provision to boost the hours worked and therefore the annual earnings of working mothers. (Twitter thread summary).

Fiscal policy

HMT games OBR? The FT’s Chris Giles reported that Chancellor Rishi Sunak instructed the independent Office for Budget Responsibility “to produce Budget forecasts using out-of-date figures”. Using older and more pessimistic forecasts about UK economic output will give the Treasury more power to refuse departmental spending requests in the Spending Review. Giles explained in a Twitter thread how the move may harm the OBR’s institutional credibility. When the figures are updated next autumn they could help justify pre-election tax cuts.

Sunak vs Kwarteng? An apparent row emerged between Business Secretary Kwasi Kwarteng and the Treasury last week, in which the Treasury claimed the Kwarteng was being “unrealistic” in seeking ambitious funding for tackling climate change in the Spending Review.

Decisive action on climate change is fiscally responsible. Green Alliance’s Sam Alvis wrote a letter to the Times criticising the Treasury, referencing the OBR’s recent report explaining the threats of unchecked climate change on the public finances. “It is a shame the chancellor is not quite so concerned about long-term fiscal responsibility”. For more on fiscal risks and net zero, see our previous Digest.

Housing and work

Poor housing = poor health. Research from housing charity Shelter found that poor housing harms the health of one in five renters in England, with a survey showing a quarter of renters are affected by damp and mould and by being unable to heat their homes.

What does ‘economic recovery’ look like for the working class? Taking aim at the Prime Minister’s claim that the UK is transitioning towards a “high-wage, high-skill, high-productivity economy” in his speech to the Conservative Party Conference, CLASS’s Paddy Bettington looks beneath the headline figures to argue that “as we emerge from the pandemic, we are in fact accelerating towards a new kind of economy - one based on poverty and insecurity”.

Trade

How Brexit could improve living standards. A new briefing note from Resolution Foundation’s The Economy 2030 Inquiry outlines how post-Brexit trade policy can create long term improvements in living standards.

Local economies

Democratising levelling up funding. In a new report, Community Power Partnerships: How to level up for the long term, Locality calls for devolution of the government’s Shared Prosperity Fund to put communities (rather than Whitehall) directly in control of funding to regenerate disadvantaged neighbourhoods.

Community-led development: a roadmap for asset ownership. CLES and the URBED cooperative have published a paper exploring local land development markets and alternative models of development which put communities in charge. The report calls for “a more supportive, less fragmented framework” for community asset transfers as a tool to support the growth of community-led development.

Redirecting finance to tackle regional imbalances. Responsible Finance published an article explaining how Community Development Financial Institutions are a “lever to level-up” through lending to SMEs and social enterprises in places with higher deprivation.