Is Inflation Coming?
Following the Covid19 pandemic the expectation seems to be that some peaks of inflation are coming across the world but that these will only be temporary. These rises in inflation have already started, the main question is how big the rises will be and how long they will be maintained for. I suspect that the situation in the UK will be somewhat different to elsewhere due to the elephant in the room that is Brexit. It's not really being mentioned in the mainstream media and is being masked at the moment by the impact of Covid19 but I believe the shock to the UK economy from Brexit will be much greater than is currently being anticipated not helped by a government that is in denial.
August 2021: In the MPC’s projection, inflation rises temporarily to around 4% in the near term, largely driven by energy and goods prices. Inflation starts to decline in 2022, and returns to the 2% target in late 2023
There are plenty of news reports about the shortage of workers whether that's for driving lorries, cooking in restaurants or picking fruit but the net outcome of any shortage is to drive up prices ie wages. There are already many examples of companies bidding up wages to get scarce staff such as joining bonuses for lorry drivers or increased pay rates. Whichever way it's done it is increasing company costs which will feed into higher prices where companies need to repair their balance sheets after Covid19.
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| Demand for scarce resources drives inflation |
All the evidence I can see around me is demand for staff. There are job adverts in shops, restaurant and pub windows all looking for people to fill vacancies. Some seem more in demand than others - chefs and kitchen staff seem particularly required. It's also now impacting on the service availability at premises, there are a number I've seen where the hours or days of opening are being limited by the staff to run the place.
Previously when there has been increased demand for staff it has been possible to bring in additional staff thanks to freedom of movement where the available pool of labour is across 500 million people not 60 million. This is no longer possible to any significant extend so the labour market is now relatively fixed.
This may be a good thing for UK wages and the UK job market but it's not likely to be good for inflation. Unless there is a sudden change in government policy then this situation is likely to continue for at least the next 4 years until a General Election. As such I can foresee that inflation will be higher for longer than currently anticipated.
Higher wages isn't necessarily a bad thing for UK employees, as current have been quite supressed over the last couple of decades and not increased significantly at least at the lower end of the job market. When I started work 30 years ago the starting salary was £11k, the starting salary for an equivalent job now is around £19k, only around 75% higher. Compared to UK house prices over the same period it shows how unaffordable housing has become.
In addition the shipping industry has been hit hard by the pandemic with containers no longer in the right locations and prices increasing massively for loads to be transported around the globe. Car production is being cut due to chip supply issues as a result of production being diverted, for some manufacturers these cuts are as much as 40% of annual production. With these forces causing shortages of certain goods prices will again be rising.
Reports of massive price increases for items such as wood for building, plaster and cement are already likely to be feeding through into increased costs for services supplied. The cost of wood for example has at least doubled in places and when prices rise it seems less likely that they will drop again if the wholesale market price reverts towards normal as it gives an opportunity for profits post Covid19 to be rebuilt.
When the shortage of HGV drivers is impacting supply chains then demands for scarce resources will tend to bid up prices as has already been seen for certain building materials. When this impact is across the economy the effect will be bigger than a labour shortage just in hospitality for example. Part of the HGV issue seems to be the reduction of vehicles coming in from the EU that previously would have carried loads both ways. For many scenarios this is no longer viable so the truck goes back empty or doesn't travel at all. That makes a requirement for an alternative trip. It's also a much bigger picture than just supply chains, the use of HGV drivers covers roles such as refuse collection so it's not just a case of delivering goods to supermarkets.
Bank of England inflation predictions from August 2020 are already out of date and interestingly don't mention anything about labour shortages of specific jobs such as HGV drivers or raw material price rises. I think the comment below from the BoE seems a little complacent and takes no account of the current restriction on labour supply resulting from the Brexit deal agreed by Boris Johnson.
The Bank of England predicts that inflation will peak at the end of 2021 but as I've explained above I don't think it will be so benign.
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| Bank of England forecasts August 2020 |
The inflation forecasts made in August 2020 shown above have already been exceeded. I'm not a professional economist but I'm surprised by the number of factors that seem to be impactful on price rises that don't appear to be taken into account so it will be fascinating to see how things pan out over the next few years.
I suspect the 4% CPI forecast will be exceeded both in value and in duration and we will still have a rate well over 3% by 2023 which could lead to much higher interest rates than currently expected.
Update - shortly after posting this the latest economic news highlighted the issues here.
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