The Economist - USA (2022-01-29)

20 Britain TheEconomistJanuary29th 2022

Torymps bypromisingtoprotectthefor eignaidbudget,andtoanotherbycutting it.Heagreedtobuilda newroyalyacht,a schemepromotedby nooneexcept the DailyTelegraph, forwhichheusedtowrite. HesaidYestoagrubbyschemetoscrap Parliament’sstandardswatchdoginorder toavengeOwenPaterson,a friendwhomit soughttosanction.(Afterthemanoeuvre failed,hecalledit a “totalmistake”.) SayingYesisnownotjustthehabitofa lifetime:itisessentialforsurvival.What everMsGrayorthepoliceconclude,his fatewillbedecidedbyTorymps.If 54 sub mitletterstoapartycommittee,hewill facea voteofnoconﬁdence.Hehassought tobuyoﬀrebels,promisingtocrackdown onirregularmigrationandabolishthelevy thatfundsthebbc. Heisunderpressureto reversea plannedincreaseinpayrolltaxes, andtorowbackongreenery.ManyTory backbencherswanthimtostay.Onesays theoppositionandpressareincahootsto “undemocraticallydepose”him;another, that calling for his resignation “only strengthensPutin’shand”.MrJohnsonhas indulgedhis party.Hisfatedependson whetherit indulgeshiminreturn. n

Monetarypolicy

Buzzkill

T

hegovernmentfacesnoshortageof crises. As well as the fallout from primeministerial parties, it must contend with fizzing inflation of 5.4% in December, the biggest annual increase in almost three decades. Officials are racing for ways to avert a crunch in April, when energyprice rises and higher payroll taxes are due. Pub lic opinion is souring; over half of those polled by YouGov on January 17th thought the government was handling inflation badly, up from a third a year earlier. And on January 27th a report by the Treasury all party parliamentary committee warned of the potential for a “wageprice spiral”. High inflation worries monetary policymakers at the Bank of England, too. At their next meeting, on February 3rd, they will probably raise interest rates from 0.25% to 0.5%. And they too are concerned by public opinion. All central bankers care about the public’s confidence in their abil ity to control inflation. If that is lost, policymakers fear that expectations of price rises will become selffulfilling. Workers expecting higher inflation may demand higher pay to compensate. As costs surge, companies may raise prices,

promptingfurtherpaydemands.Nosuch wagepricespiralhasdevelopedinBritain fordecades,despiteconsumerpriceinfla tionabove5%in 2008 and 2011 (seechart). Butthepandemicmay havecreatedthe conditionsforsomethingextraordinary. Sofar,householdsurveyswarrantcau tion,notpanic.OnepublishedonJanuary 26thshowedexpectationsofinflationina year’s timerisingto 4.8%,much higher thanthepost2005averageof2.6%.Ricar do Reis and colleagues at the London SchoolofEconomicsfindthata growing shareofhouseholdsexpecthighinflation sometimeinthenextfivetotenyears,his toricallya precursorofuntetheredexpec tations.Buttheshiftisstillsmall. Anotherplacetolookforbrewingpro blemsisinwagetrends.Averagepayex cludingbonusesgrewby3.8%inthethree monthstoNovember2021,inpartbecause oftightawardsin2020.Afterrisingfrom around3%to19%between 2019 and2020, cashfreezesasa shareofpayawardsfell over2021,accordingto IncomeDataRe search,a datafirm.Ina speechonJanuary 21stCatherineMannoftheBankofEng landsaidthatalthoughwagesinDecember wereslightlyabovetheirprecovidtrend, they“showedlittlesignsofspiralling”. Still,there are indications thatwage pressurecouldcontinue.Veryfewpeople who wantajobdonothaveone,which givesthoseinworkgreaterpowerinwage negotiations. As foodandenergyprices rise,employersarebracingthemselvesfor paydemandstogrowlouder.NeilCarberry oftheRecruitmentandEmploymentFed eration,anindustrygroup,expectsmedian paysettlementstoriseabove3%thisyear, comparedwithanaverageofaround2% overthe2010s. Themost direct evidenceofplanned price increases comes from companies themselves.Facedwithhighercostsofraw materials,risingenergypricesandbigger paybills(includingastheresultofa higher minimumwage),companiessurveyedin December outlined plans to raise their pricesby5%in2022,morethanthe4%in

creasetheyreportedin2021.MsMannsaid that“itshouldbea concernthatthecosts from 2021 arebecomingreflectedinprice expectationsfor2022”. Other reasonsto beconcerned about Britain’sinflationarydynamicsincludethe spreadofpriceincreasesbeyondgoodsto services.Evidencealsosuggeststhatfirms facinghotdemandraisedtheirpricesby more thanthose facingcooler sales cut theirs.Bothaddtotheriskthatpricein creaseswillnotreverseonceallthesupply chaindisruptionfades.MsMannwarned that if further shocks hit Britain from abroad,Brexitcouldmakethemworsebe causecompaniesprotectedbytradebarri ersfromforeigncompetitionmightfeel saferinraisingprices. These dynamics could peter out on theirown.Assupplychainproblemssub sideandenergypricesreturntomorenor mal levels, goodsprice inflation could wellsink.Britain’seconomicrecoverymay falter,ortaxrisescouldsqueezeincomes. Eitherwouldmakeit harderforcompanies to shunt higher costs onto consumers. SanjayRajaofDeutscheBankpointsout thattheprofitabilityofservicesfirmshas increasedoverthepast 18 months,giving them headroom to absorb some ofthe highercosts,shouldtheychooseto,rather thanpassthemon. TheBankofEnglandseemsunwilling totakeanychances.InDecemberitraised interestratesto0.25%,asa defenceagainst a mutuallyreinforcingescalationofwages andprices.ThendatainJanuaryshowed thatinflationinDecemberhadbeen0. percentagepointsabovewhatithadpre dicteda monthearlier.Thatwasthebank’s biggestevererrorina forecastatthattime horizon.Unlikethoselivingandworking inDowningStreet,monetarypolicymakers stillhavetimetostopeventsspirallingbe yondtheircontrol. n

The Bank of England is determined to prevent a wage-price spiral

Scrambling to catch up Britain, actual inflation v inflation expectations %

Sources:ONS;Citi/YouGov

6 5 4 3 2 1 0

22191715131109072005

Next five to ten years

Next 1 months

Actual

Gathering evidence for wage talks

The Economist - USA (2022-01-29)

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