Today’s blog post once again comes from the Huddersfield Royal Infirmary Costa so will be another short one (shout out to the nurse who just asked me if I ‘was writing my little blog again today’). Again the hospital is an appropriate setting to write about our ailing economy because earlier today the MPC voted to raise Bank Rate to 5 per cent. It should have come as a shock to nobody as inflation remains high. This high inflation is exacerbating the cost of living crisis and this looks set to continue for months while millions of households face even more pressure in mortgage payments.
It’s all pretty grim. So, what is causing this economic malaise and how do we get out of this mess?
If you look at the ONS’ basket of goods it is possible to see how much the items households frequently buy cost. It’s no surprise that food and energy prices remain high as is hospitality. More surprisingly it looks like the release of the new Zelda game is also responsible for the strength in computer games sales (another thing we can blame the nerds for). However, all this really tells you is that you’re spending more money on stuff but what is actually causing high inflation?
As I wrote yesterday, the Bank of England is partly responsible. Monetary policy probably was too loose during the pandemic and the Bank too slow to tighten when the economy reopened. This is only part of the problem. Milton Friedman famously once said that ‘Inflation is always and everywhere a monetary phenomenon.’ Friedman was wrong. We also need to look at the supply side of the economy and this is the responsibility (and failing) of the government.
Headline inflation will no doubt start to decrease soon as we see falls in food and energy prices. There are things the government could do to ensure that the economy is in better shape to deal with headline inflation in the future such as building more nuclear power plants, wind turbines, and solar panels so that households and businesses don’t face huge spikes in their energy bills.
However, core inflation looks likely to remain high while economic growth remains stagnant. The only way to fix this is by improving productivity. The government needs to liberalise the planning system so that millions of new homes can be built, especially in and around London. We also need to improve transport infrastructure, especially in the North and South West of England. The tax system needs to be reformed to incentivise investment and reduce the burden on businesses.
Filling the record high level of vacancies needs to be a priority. Although it’s encouraging that the government is looking at this through childcare reform, this is only part of the solution. We have people too unwell to work or who are caring for others so we need to reform health and social care. However, the most effective way of filling these vacancies and lowering costs for businesses is by increasing immigration.
The UK’s post-Brexit immigration system is relatively liberal in terms of high skilled immigration but is still restrictive in terms of low skilled immigration. We need to massively increase immigration, especially of low skilled workers. This should be achieved by opening the borders to the rest of the world and allowing anyone who wants to work given the right to do so. In an ideal world this would be a permanent system but it would not be politically possible. As such, a temporary one year visa should be issued allowing vacancies to be filled and inflation to be brought under control while a viable long term solution is found.
The correct long term solution is obvious but again politically difficult. The UK should rejoin the Single Market. Such a move would not only make it much easier for businesses to find the workers they need, it would also reduce friction with our largest trading partner. This would boost productivity and mean that the UK is less susceptible to future shocks and high inflation.
The government needs to let the Bank of England get on with its job of managing the demand side of the economy and should instead focus on boosting supply. Some of the policies will be unpopular but it needs to be bold if we are to have any hope of tackling high inflation.