The politics of food price inflation
Jonathan Edwards
For an early August, last week was busy on the economic front. The highlight was the decision of the Monetary Policy Committee (MPC) of the Bank of England to cut 0.25% off the base rate.
From a Treasury point of view this is welcome news as they hope monetary policy easing will increase economic activity and hence tax revenues.
The politics of the vote was very interesting with two rounds of voting which is far from normal and indicates the competing tensions MPC members are grasping with.
Indeed, this was the first time in the history of the MPC that two votes have had to be held to get to a majority position.
In the first round four members voted to keep the Bank interest rate as it was at 4.25%. Four members voted for a 0.25% cut. One member voted for a 0.5% cut in the first round. In the second round of votes five members voted for changing the rate to 4% and carried the day.
Conflicting data
MPC confusion was based on conflicting data. On the one hand, the overall economic picture is of a sluggish economy which would favour the easing of monetary policy. Indeed, such is the poor outlook, one of the members wanted a more drastic cut.
On the other hand, persistent inflation continues to spook rate setters, and the fact that Chief Economist Huw Pill voted to keep rates at 4.25% is significant.
The other big event was the report by the National Institute of Economic and Social Research (NIESR) UK Economic Outlook: The Chancellor’s Trilemma, which was a sobering read to say the least.
While the Office for Budget Responsibility in its last report indicated an improving economic picture for next year with 1.9% GDP growth, the NIESR report calculated a slowing economy from 1.3% this year to 1.2%.
If the OBR was to come to the same conclusion in its next report, the Treasury bean counters will witness the fiscal straitjacket tightening its grip further. Or in other words as the NIESR report puts it, ‘substantial adjustments in the Autumn Budget will be needed to meet the stability rule’. Code for tax rises and/or cuts in public expenditure are on the way, both of which will be a drag on economic growth.
Slowing economy
Returning to the MPC, data indicating a slowing economy would undoubtedly encourage action to reduce the cost of borrowing. Why did nearly half the committee therefore make the case that the base rate should stay the same?
The reason for this is that inflation in the economy when it comes to the cost of everyday items remains annoyingly stubborn. More worryingly, the costs of some essential goods are likely to increase. Those that lost the vote on the MPC are worried that cutting interest rates will make inflationary problems worse.
The piece of economic news from last week that would worry me most if I was the Chancellor, or a Labour politician facing election any time soon, are the projection for a spike in food prices in the coming months.
The British Retail Consortium anticipates that food prices will increase by 6% by the end of the year after the rapid increases of recent years. After shoppers leave a supermarket, they will have a stark reminder that their household budgets are being squeezed.
While the reasons for increasing food prices are complicated, Labour’s opponents, I am confident, will be pointing to the decisions made by the Chancellor last Autumn, specifically those that have led to the increased cost of employing people, as having played a significant role.
Food price inflation
Largely because of increasing food price inflation the NIESR report indicates that the bottom 10% in society face further reduced living standards. Remarkably for this cohort, living standards are 10% below pre-Covid levels.
If the left wants a reason why the poorest in society are turning to extreme right-wing populism, look no further.
The fundamental economic problem facing the Chancellor is that economic growth at a UK level is less than half what it was before the Great Financial Crash of 2008. The Tories failed to turn the economy around during their 14 years in power and now look doomed as they have been consumed by a challenger party.
For Labour to repel the challenges it faces from both its flanks, it has to find a way of vastly improving the economic picture. Regrettably for the Chancellor, after one year in power matters appear to be getting worse not better.
For Labour candidates in Wales next May, time is running out quickly.
Jonathan Edwards was the MP for Carmarthen East and Dinefwr 2010-24
Support our Nation today
For the price of a cup of coffee a month you can help us create an independent, not-for-profit, national news service for the people of Wales, by the people of Wales.
The poor can look to the far right for solutions but they will offer nothing but hate and hate filled policies and fill up their own pockets with oil and gas. That is what is happening across the pond.
Jonathan, most people living on average wage or below will tell you that those Indicies understate the reality of everyday life. We are well past the point of plausibility with this kind of data and people still wonder why likes of Reform are gaining ground. It’s a case of one liar against another but the one bunch – Labour, Tory et al – have had a long run at fixing things and just dug deeper holes so it’s kind of inevitable that the other bunch will end up being given a turn at the wheel. Matters are made worse by… Read more »
“The fundamental economic problem facing the Chancellor…” is not the lack of growth but that Rachel Reeves and the august bodies you mention in your article, Jonathan Edwards, do not appear to understand 1. how money works and 2. how the real economy works. As a result, they are looking through the wrong end of the binoculars trying to discern the barely perceptible movements of microeconomic functions that anyway fail to connect with the needs of people. One may cite the ongoing confusion of using interest rates – mortgage holders are just collateral damage – to control inflation. Hint: it is… Read more »
Interesting angle but, given that government spending is the highest it has been for 80 years, if the public sector can ‘power an economic revival’ as you suggest, why is it not already doing so? To hand over even more money to the public sector in the hope of following your theory would either require: a massive increase in taxation which would be felt in everybody’s pocket, and let’s not pretend that can be achieved solely by taxing the rich – there aren’t enough of them (only five billionaires in Wales). or by printing money on an even larger scale… Read more »
Difficult to believe you read my comment, Thomas! Why isn’t the government already using the public sector to ‘power an economic revival’? 1. That is their political choice, not an economic one. There is clearly not enough funding being given to maintain hospitals and schools, for a start. They have defenestrated public services with their repeated cuts. 2. Their political choice is to favour the holders of capital, and, sure enough, wealth gushes up. 3. Meanwhile, what funding they do provide comes from your dreaded MMT – yes, the source of ALL government funds. They print it but mostly create it electronically. 4. Don’t be taken in by government… Read more »
Does the ONS include yachts in their basket of goods when calculating inflation?
Only means appear in the ONS data, Bryce.
Looking only at means, one might conclude that there is no poverty in Cymru, nor wealth.
Statistics that provide only means are inadequate – a range or a standard deviation as well would be helpful.
Even better to ask the people suffering from inflation for food or housing, say, but perhaps not yachts, about the impact of that on them.
So increases in the prices of luxury goods aren’t contributing to inflation, as it’s calculated by the ONS.
The UK growth figures are surprisingly good internationally. The inflation is of course higher for a number of reasons. But fundamentally labour, and indeed any political party if in power seems trapped – reducing tax base, ageing population, higher needs of public sector services, less money to pay for public sector, higher prices etc. It’s a viciouscycle and personally I can’t see a way out of it. I expect a period of further stagnation for at least 20 years. Happy days
There’s lots of ways out of it. A one-off Covid levy on assets over 1 million to cut the Covid debt, permanently reducing debt interest payments freeing up more money for public services. A voluntary 2% income tax surcharge paid by those that voted for Brexit. While unlikely, if the numbers opting for this don’t reflect the 2016 results then the results can be nullified allowing us to rejoin the single market turbocharging growth by slashing red tape. Stop paying state pension benefits to the 25% of pensioners who are millionaires, and retirees living overseas. Invite tenders from nations in… Read more »
Agreed.
The state pension is not supposed to be a means tested benefit. You’re supposed pay your national insurance contributions and this forms you pension. In short, you’re getting back out what you’ve paid for. That state pension actually comes out of general taxation I believe was a Labour government decision to free up money to spend. As for a covid levy on assets… haven’t we already had covid levies? I’m happy to tax bankers, ceos, and other people hold silly sums of money but taxing assets over 1,000,000 would impact hundreds of thousands of small business owners (not really the… Read more »
The way constructive discourse occurs is when one proposal is countered by a better proposal. You’ve tried to dismiss two without proposing alternatives to a serious problem that can’t be ignored. State pensions weren’t “supposed” to be anything more than looking after older people who could no longer rely on their own labour in their final years. They certainly weren’t intended to help the wealthy pay for another cruise every year for four decades. And any modern understanding of what state pensions were “supposed” to be was predicated on current retirees working life being spent within an economic partnership. Changing… Read more »