the times | Tuesday December 21 2021 43

CommentBusiness

Rogues gallery for a year when

everybody was living dangerously

I

nflation is surging in the UK

and across the western world.

Last month prices facing

British consumers were 5.1 per

cent above a year ago,

according to the consumer prices

index, the Bank of England’s target

measure. The retail prices index,

which has a much longer record

tracking inflation, is 7.1 per cent up

on a year ago. That is the biggest

annual RPI increase for more than

30 years.

In the United States CPI inflation

is 6.8 per cent and in Germany it is

6 per cent. Across the eurozone it is

4.9 per cent and averages 5.2 per

cent in the European Union.

So the surge in inflation is not

confined to the UK, but neither does

it appear likely to fade away quickly.

In August the Bank of England

expected UK inflation to hit 4 per

cent and then quickly subside. Four

months later it has uprated its peak

CPI inflation forecast to 6 per cent,

which the Bank is projecting for

spring next year.

There is more to the rise in

inflation than one-off factors, such

as rising oil and gas prices or cost

increases in global supply chains. In

Britain’s case, there are four factors

that point to a more sustained

period of high inflation, which looks

likely to continue through 2022 and

possibly into 2023.

The first issue is evidence of more

inflation coming through the

pipeline, particularly in the

manufacturing sector. Factory gate

prices were 9.1 per cent up on a year

ago in November and prices of

materials, components and energy

bought by British manufacturers

were up 14.3 per cent. The CBI’s

industrial trends survey points to the

highest rate of price increases since

the late 1970s.

Second, the labour market is very

tight, with the unemployment rate

down to 4.2 per cent, not far above

the pre-pandemic level. Meanwhile,

the number of vacancies is above

1.2 million, compared with 700,000

to 800,000 before the pandemic.

The tight situation in the labour

market is starting to be reflected in

upward pressure on wages. Average

earnings in the past three months

were 4.9 per cent up on a year ago,

according to the latest official data.

The inflation surge could add

further to the upward pressure on

wages, potentially fuelling a more

persistent wage-price spiral.

Third, there are tax and national

insurance rises pencilled in for next

year. VAT on the hospitality sector

will rise from the present rate of

12.5 per cent to 20 per cent next

April and employers and employees

will find themselves paying higher

national insurance rates next April

as well. The employer rate will rise

above 15 per cent, imposing a direct

increase in labour costs, and

employees may look for

compensation for the extra 1.25 per

cent national insurance rate they

will also have to pay.

Finally, the rebound in spending

after the ending of this year’s

lockdown is creating a situation

where demand is running rapidly

ahead of supply. The value of retail

spending, for example, was 11.6 per

cent above its pre-pandemic level in

November 2021, according to figures

released on Friday. That is

equivalent to retail sales rising in

cash terms by 6.5 per cent annually.

The new Omicron Covid-19

variant may put a dampener on this

spending surge next year, but, if not,

further rises in interest rates will be

needed to keep spending and

inflation in check.

The monetary policy committee

recognised last week the need to

start raising interest rates, albeit

very modestly by increasing the

Bank Rate from 0.1 per cent to

0.25 per cent.

If we are to stay on top of the

present surge in inflation, however,

more rate rises are likely to be

needed next year. It would not be

surprising if we end 2022 with the

official interest rate at somewhere

between 1 per cent and 2 per cent —

a significant move up from the

near-zero rates that we have become

accustomed to since the 2008-09

financial crisis.

Andrew Sentance

It’s been a bit of a

pantomime all year

in the business and

financial world — a

mix of magical good

fortune, cruel setbacks and clownish

slapstick. Next week I pick a half-

dozen heroes in the drama, but first

here are my villains of the year.

The amiable Andrew Bailey might

seem an unlikely candidate for the

swirly cloak and twirly moushachios,

but the governor of the Bank of

England is a shoo-in for incompetent

villain after failing in his primary duty

— to keep a grip on inflation. He

started the year with the official

annual inflation rate at a reassuringly

tame 0.3 per cent and ends with it

blowing out to 5.1 per cent, 17 times

faster, and heading even higher. To

6 per cent by April, he now concedes.

To judge by his past record in

underestimating inflationary forces, it

may well go higher than that. Millions

are going to be badly squeezed by this

rise in the cost of living next year,

especially those on fixed incomes.

Bailey and his fellow rate-setters

had a difficult hand to play, but it was

dangerous to keep rates at an

unprecedented three-centuries low

when the economy was bounding out

of lockdown. To continue £895 billion

of money creation was even more

reckless and was bound to exacerbate

price pressures thrown up by supply

chain difficulties.

They can’t say they weren’t warned.

From the Bank’s former chief

economist to the Lords’

economic affairs committee,

there were plenty sounding

hawkish notes. The Bank

seems to have preferred the

consensus of investment bank

economists who, strangely,

always prescribe more of the

magic sauce that keeps

asset prices puffed up.

My second villain is

David Cameron. The

former prime

minister bombarded

ministers and public

servants with emails

and messages to try

to get special

treatment for

Greensill Capital, the

flawed finance firm that

went bust in March. Cameron, paid a

reported £29,000 a day by Greensill,

used every method possible to get

access to taxpayer-funded support

schemes. Founder Lex Greensill was

given extraordinary access to

government in the Cameron years,

including being allowed to meet his

investors in Downing Street. It did

damage to politics. Cameron showed

“a significant lack of judgment”,

according to the Treasury select

committee. It did damage to business,

too, sending the message that sleazy

ingratiation with politicians and

regulators is the way to success.

It has been a year of profound re-set

in the balance of power between

institutional investors and

entrepreneurs. The Hill review

decided that entrepreneurs must be

given more privileges and freedoms if

London is to prosper as a financial

centre. Into this accommodating

world strolled Matt Moulding,

(boooo!), founder of The Hut Group,

who seems to have taken it upon

himself to see just how far he could

push things. A special golden share

giving him absolute power to reject

takeover offers? Of course. Combining

the roles of chairman and chief

executive? Yup. Why not throw in a

potential conflict of interest by

allowing him personally to be a big

landlord to the company? Go on, then.

The subsequent collapse in THG

shares to less than half the float price

and a quarter of their peak has helped

to silence those calling for unchecked

power for disruptive entrepreneurs.

Moulding is now unwinding at

least some of his special privileges.

The hissing from the stalls is for

another villain of 2021, Alan Cook,

chairman of LV=. The failed

attempt to sell one of Britain’s

biggest remaining mutuals

to Bain Capital, an

American private

equity group, was one

of the cock-ups of

the year. The

conversion from

mutual

cheerleader to

sellout was never

properly explained.

The figures were

opaque,

communications

lamentable and the

members’ affection for a

mutual model, however

flawed, totally

underestimated. No wonder so many

policyholders suspected this was a

deal engineered primarily to benefit

the management.

It might be invidious to single out

only one scapegoat for the energy

price cap shambles, which led to

twenty-eight energy suppliers going

bust this year. Everyone from Theresa

May, who pushed through the policy

in 2019, to Vladimir Putin, who made

matters worse by restricting gas

supplies at just the wrong time, shares

the blame. One egregious fall guy has

to be Hayden Wood, co-founder of

Bulb Energy, the biggest supplier to

fail having scooped up 1.7 million

customers through slick marketing

and a renewable energy promise.

Bulb went from sales of £761,000 in

2016 to £1.5 billion in 2020. Like so

many others, Wood, a former Bain &

Co management consultant, seems to

have paid far less attention to balance

sheet resilience and precautionary

hedging than to signing up more and

more customers. Bulb, still with Wood

at the helm, in effect has been

nationalised — with taxpayers on the

hook for £1.7 billion.

My final villain is Matt Damon.

There have been many useful idiots

over the past 12 months happy to

stoke the crypto bubble, including

Kim Kardashian, but they don’t

come much more influential than the

Jason Bourne actor. Damon fronts

high-end TV adverts for the

Crypto.com platform featuring

astronauts, aviators and

mountaineers. Cut to Damon, who

burbles: “Four simple words have been

whispered by the intrepid since the

time of the Romans — fortune favours

the brave.”

It is pretentious and portentous

bilge. You can buy all the dogecoin on

margin that you like, it won’t make

you Neil Armstrong or Edmund

Hillary. Worse, the craze is sucking in

impressionable youngsters, as any

teacher with their ear to playground

chatter is well aware. More than

2.3 million adults in Britain have

bought digital currencies. Worldwide

their aggregate value is $2.5 trillion.

That’s a lot of value going to go up in

smoke at some

point. Not so much

The Talented Mr

Ripley as The

Talented Mr Rip-off.

‘‘

’’

Patrick Hosking is Financial Editor

of The Times

Andrew Sentance is senior adviser at

Cambridge Econometrics and a former

member of the Bank of England’s

monetary policy committee

Inflation looks here to

stay and that means

more interest rate rises

Matt Damon fronts high-

end TV adverts for the

Crypto.com platform

Patrick Hosking

‘There is more to the rise

in inflation than one-off

factors, such as rising oil

prices or cost increases

in global supply chains’