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Sensemaker: Inflation

Sensemaker: Inflation

Tuesday 28 September 2021

What just happened

Long stories short

  • The UK’s petrol crisis entered its fourth day with stories of brawling in queues and reports that up to 90 per cent of independent retailers were without fuel (more in tonight’s Open News ThinkIn).
  • A jury found singer R Kelly guilty of racketeering and sex trafficking charges after a six-week trial in New York. He will be sentenced in May, and faces life in prison.
  • Palaeontologists identified a 25 million year-old eagle fossil found on an outback cattle station in South Australia as one of the world’s oldest raptor species.


The UK’s standard inflation measure has risen by its fastest rate on record. In the year to August, the Consumer Prices Index increased by 3.2 per cent, which is over a third higher than the July reading and a third higher than the Bank of England’s target. The Bank has warned that inflation will reach 4 per cent in winter. At that rate, inflation would cut the average household’s annual disposable income by £700. People are worried.

Internet searches for “inflation” are rising sharply. The Bank’s own chief economist described this as a “dangerous moment”. The Daily Telegraph called it a “nightmare”. The Guardian said it was a “perfect storm”. But how worried should we really be?

It helps to look behind the headline inflation index:

  • The greatest upward pressure on the index was a simple base effect. That is, prices in the UK were kept low last year – because of the government’s Eat Out to Help Out discount scheme and reductions in VAT across restaurants and cafés – and quickly moved back to more normal levels as pandemic restrictions eased.
  • The sectors that contributed most to inflation fit this picture. As restrictions on movement eased, the demand for transport increased rapidly. It’s the transport sector that made the greatest contribution to the inflation rise: 27 per cent of it, mainly due to more expensive motor fuels. Restaurants, hotels, and “recreation and culture” together accounted for 21 per cent of the rise. Housing and household services accounted for 20 per cent, which was mainly down to higher gas prices.
  • But it’s not just gas. The prices of almost all commodities – from wheat, sugar, and coffee to oil and CO2 – increased globally. During the pandemic, suppliers assumed that, as in a typical economic recession, the demand for goods would fall, so they cut back on much of their supply. Instead, furlough gave people more money than they would normally have in a recession and, because most service sectors were shut, they could only spend it on goods.

The UK government has said it will stop its furlough scheme on Thursday. As the scheme winds down its fiscal stimulus and the index base effects wear off, the only source of sustained inflation in the UK would be a tight labour market: more vacancies lead to higher wages, which feed through to prices. 

The government is using the first part of this causal chain to make an argument about improving the living standards of workers. Boris Johnson is leaning on firms to increase the wages of lorry drivers to deal with an extremely acute labour shortage.

In a sense it’s working. Wages have increased rapidly and unemployment has fallen over the past few months, but the picture varies by sector. Some firms, especially in hospitality and haulage, are struggling with severe labour shortages and are hiking wages. Other sectors are managing perfectly well. Such is the nature of the pandemic shock. Unlike typical recessions, this one is very sectorally unequal, hitting sectors that require social contact much more than those that don’t.

If shortages were spread across the labour market, we’d all be working long and hard. But total hours worked in the UK are still below pre-pandemic levels. The excitement about surging activity in hospitality is, again, biased by the base effect – focused on rates of change (from a low level) rather than the level of activity, which remains low.

There is still a long way to go before the UK economy, particularly its labour market, recovers. Until it does, there won’t be a source of medium- or long-term inflationary pressure. The short run will be unpleasant. Inflation will eat away at incomes and savings. The Bank was under pressure to raise its interest rate, thereby increasing the value of money and so countering inflation, which erodes it, but it recently decided against a hike. 

The Bank concluded that this current inflationary period is temporary – and raising its rate to counter a short-run shock would have risked locking in a weak recovery. It’s more worried about the economy in aggregate than inflation alone, and that’s a good guide for the rest of us.

Belonging identity, society, beliefs, countries

Crashing the Zoom party
The Cambodian prime minister admits he’s been spying on his political opponents over Zoom. Hun Sen, a former soldier who has ruled the country for 36 years, interrupted the Cambodia National Rescue Party (CNRP) meeting earlier this month to criticise senior members of the party, telling people on the call to stop insulting him if they ever expected to be allowed back into the country. In 2017 the CNRP was dissolved by the country’s (corrupt) Supreme Court after accusations it plotted to overthrow the government, forcing many of its politicians into exile. After a recording of Hun Sen’s Zoom bomb went viral on Facebook, a spokesman for the ruling Cambodian People’s Party attempted to pass the video off as an “elaborate fabrication”. The prime minister’s office eventually had to admit that he’d attended 20 opposition party meetings. Hun Sen later posted on his Facebook page that he joined the call to “give a warning message to the rebel group” and that they should be aware that his “people are everywhere”. Hun Sen uses social media for his own agenda, but has sent a clear message that online dissent will not be tolerated.

New things technology, science, engineering

Gotta buy them all
Prices may be rising, but a single Oreo biscuit selling for $100,000 is quite a step beyond inflation. It is not just any Oreo though. Pokémon has partnered with the American brand to release special biscuits with 12 different characters imprinted on the chocolate top. But not all biscuits are made equally. One specific legendary Pokémon – Mew – has become a rare find for collectors. A full pack selling for only $3.59 in the States, but you pay anything from $10 to a whopping $100,000 on eBay for the honour of owning one with Mew on it. The more ‘perfect’ the Oreo, the higher the price. It could be a lucrative investment – Pokémon collectables have long had a big price tag – or just a very expensive afternoon snack. 

The 100-year life health, education, living, public poliCY

Going private
NHS waiting lists for all categories of surgery have lengthened since the start of the pandemic and remain longest in the most deprived areas of the UK. One result is an increase in the number of people going private, increasing inequalities in healthcare provision in a country that claims it’s all free at the point of delivery. Another is a £10 billion funding increase promised earlier this month to clear the surgery backlog. But an analysis by the Health Foundation suggests the real sum needed to meet the government’s target of limiting wait times for operations to 18 weeks is closer to £17 billion. The research on waiting lists was conducted by the King’s Fund for last night’s Panorama programme, which included Sofia Jones of Dundee going private for a £7,000 endometriosis operation “to have some quality of life” even though it meant going into debt. The alternative was a two-year wait. The BBC’s write-up includes a price list for private operations in the UK. A heart valve replacement currently costs £20,200. It’s not much consolation, but the same operation would cost $200,000 in the US. 

Our planet environment, natural resources, geopolitics

Panel wars
Falling solar panel prices are central to plans to decarbonise the US energy sector. Now US panel manufacturers want to keep prices up by banning imports of Chinese panels that undercut them. The imported panels already face stiff import tariffs, and the US Solar Energy Industries Association has petitioned the Commerce Department to raise them still higher. In response, big Chinese manufacturers that had already tried moving operations to other Asian countries to disguise their panels’ origin are now suspending shipments altogether. What’s good in principle for American manufacturers is bad for American installers, the WaPo reports. They’re finding it impossible to source affordable panels. The rate of solar power deployment has to triple or quadruple to hit the Biden administration’s 2035 carbon emissions targets. It’s not happening. 

Wealth investment, fairness, prosperity

Soak the young
The UK government is planning to cut the earnings threshold at which graduates start paying back student loans, according to the FT. Currently graduates begin repayments when they earn at least £27,295, a salary level beyond which they will already pay a marginal tax rate of at least 42.25 per cent from April 2022 (when the National Insurance (NI) rise will kick in). The new earnings threshold hasn’t been decided, but the 2019 Augur review into higher education recommended it be lowered to £23,000. At that level, factoring in the NI hike, a graduate earning the current threshold would see their take-home pay fall by more than £800 annually. It could save the Treasury £2 billion a year, but at the cost of further hammering young people whose political representation grows smaller by the day.

Thanks for reading, and do share this around.

Paul Caruana Galizia

With additional reporting by Giles Whittell, Xavier Greenwood and Phoebe Davis.

Produced by Phoebe Davis and edited by Xavier Greenwood. 

Photographs Getty Images