London Eye: Inflation heralds a less than merry Christmas

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London Eye: Inflation heralds a less than merry Christmas
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Official indices of inflation always appear a feeble follower to people’s experiences of it. But the new official indications bring worrying confirmation that just about everything is getting more and more expensive in Britain, and fast.

The government blames Covid more than Brexit, but it is becoming undeniably clear that Brexit is at the bottom of changes hitting the British economy. And these do not appear as changes for the better. Of the brave new prosperity promised through Brexit, there is little sign; of quite the opposite there are several.

The broad pathway to inflation in the prices of goods is familiar. The cost of container freight has risen manifold, road haulage has become costly due to a paucity of lorry drivers and consequently higher wages for them, delays at ports as a result of delayed offloading and movement have added to costs. As always retailers have passed the costs on to consumers, and of course passed some profits to themselves under cover of rising costs.

Also Read | RBI projects CPI inflation at 5.3% for FY22, says likely to peak in Q4

Government and Bank of England leaders are careful to avoid Brexit as a publicly stated reason for some of this inflation. But there is no denying the inflation itself. That is expected to cross 5 percent over the next few months.

“If wage earners’ expectations of future inflation rise in response, or if they seek compensation for the rises in the costs of living that have already occurred, wages could also accelerate further, even without any additional decline in unemployment,” Ben Broadbent, deputy governor at the Bank of England with responsibility for monetary policy said at the Leeds University Business School this week.

Broadbent said he expects the inflation in the prices of goods to subside later next year, and for it to stabilise over the next couple of years. The Bank clearly wishes to hand out calming reassurances in a bid to contain the spiralling inflation currently underway. But reassurances of better times to come two years hence have never been known to calm difficulties in the present, with jitters about more to come.

Also Read | Under fire, UK PM apologises for staff joking about Christmas lockdown party

Omicron is an unknown factor ahead, Broadbent acknowledged, as no doubt other mutations would be. But projections around this will be a factor in any Bank of England decision to revise interest rates from their present low of 0.1 percent. The next Bank meeting to review rates is due December 16.

For now, markets have rallied as fears around Omicron have faded past the first jolting days.

Christmas

That has done little to halt the current inflation that threatens to hit at the point when people will feel it most – the Christmas dinner table. Turkey and Christmas puddings are priced considerably higher, as are Brussel sprouts that appear on the tables a painful reminder of where some of this inflation is coming from, even if the government will not say so.

A supply chain disruption and labour shortages, the two major factors behind the price rise, both arise directly from Brexit. Checks at EU borders have delayed deliveries and raised costs. Much of British production and transportation has been hit by a shortage of workers from the EU as a consequence of Brexit.

Also Read | UK inflation surges to highest rate in nearly a decade

Grocery prices are rising currently about 1 percent a week. Not all of this is a consequence of Brexit, though. Food prices have risen globally. The Food and Agriculture Organisation estimates they have risen 30 percent in a year, particularly with cereals and vegetable oils.

In Britain, the price rise has not yet hit shopping choices significantly. Consumers are at present happy to pay more this year after losing out on Christmas last year. But past the festive mood, the squeeze is certain to feel tighter. At present only about a third of workers in Britain have seen increased wages to deal with rising costs.

The rising costs of energy have driven inflation across the board, and worse is expected. Energy bills are expected to rise more than 30 percent next year. This clearly is a result primarily of supply and demand issues in the global market. The knock-on effect of a rise in fuel and heating costs is familiar. This Christmas these forces are all coming together. It will simply cost more to get to loved ones, to stay warm with them, and to dine with them.

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