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