the times | Wednesday February 16 2022 37

Business

The rising cost of

fuel could hit harder

than higher energy bills

Now may be the right time to look

closely again at the money supply

I

s anyone still unaware of

Jack Monroe, the food blogger

and poverty campaigner whose

call for supermarkets to widen

the availability of “value lines”

on food staples has gone viral? On a

Twitter feed viewed more than

ten million times, she posted

powerful examples of the impact of

these product lines, with the

cheapest pasta in her local Asda

store costing 29p on a value line, but

70p if not. Asda won praise for

heeding her calls, with Monroe’s

local basket reducing in price by well

over 50 per cent as a result of Asda’s

changes. Other supermarket chains

fared less well.

We probably didn’t need this

example to remind us that the

impact of the cost-of-living crisis will

be unevenly distributed, not just

among consumers but also among

businesses. Consumers — and

employees — will judge firms on

how sensitive they are to those in

greatest need.

The level of hardship facing many

consumers is real, with a perfect

storm of rising energy costs, price

rises for essential household goods,

tax increases and benefit cuts. The

headline inflation figure may be set

to exceed 7 per cent later this year,

but for low-income families it is

likely to be far more. The doubling of

average energy costs over the past

year will hit the poorest hardest,

with heating representing a higher

proportion of household spending

(rising to 12 per cent). If petrol prices

continue to rise as some have

forecast (to 160p per litre), then car-

dependent households could spend

£1,200 more per year, even more

than the energy cost rise. At the

same time, income is reducing for

many, with cuts to universal credit of

£20 per week (£1,040 per year) made

in October last year now biting. The

national insurance rises due in April

will subtract £354 from median take-

home pay. The government support

measures will help, but only in part.

It’s hardly surprising Citizens Advice

is taking 40 per cent more calls

about debt issues than a year ago.

Behaviour can change, too, as

people struggle. When struggling,

people are more likely to access

high-cost credit or to fall prey to

firms charging people over £1,000

for debt restructuring (which

charities offer for free). The need to

cope “right now” can lead to hard

decisions with longer-term

consequences on physical, mental

and financial wellbeing, such as

cancelling the data allowance that

helps with schooling and online

banking.

Not that this is easy for business,

either. Few firms are not worrying

about how to deal with rising

inflation in their supply chains and

labour costs, or debating how much

can be absorbed rather than passed

to customers. The biggest fall in

disposable income in three decades

means that revenues are likely to

decline in many sectors. For many

businesses that have just survived

the pandemic, this could be the final

straw.

But businesses do have choices. As

Asda has shown, executives can take

decisions that avoid disproportionate

impact on customers on the lowest

incomes. Thoughtful marketing is

important as lower-income

consumers may struggle to access

deals if offered on direct debit,

online or in bulk. With more than

half of those in poverty also in work,

there are compelling reasons to

ignore the governor of the Bank of

England’s call for wage restraint for

front-line workforces (as data from

the Chartered Institute of Personnel

and Development shows we are

doing). Businesses have a choice

whether to increase pay for all staff

by the same percentage or to weight

rises to those on the lowest incomes.

We also have choices about how to

deal with customers who are

struggling. Financial services firms

have been on standby to focus on

vulnerable customers for the two

years of the pandemic, in a largely

phoney war given widespread

furlough support. Now is when that

help is needed.

The next few years will be tough

for consumers and business alike.

Let’s show that business is a force for

good in this crisis.

David Smith

Natalie Ceeney

Let me reintroduce

you to an old and,

for many, a long-

forgotten friend. I

am talking about

the money supply, which, less than

40 years ago, dominated UK

economic policy but which now lurks

in the shadows. It played a significant

part in my life, being the subject for

my first book, The Rise and Fall of

Monetarism, though now, like its

subject, it is lost in the mists of time

and out of print.

I mention it because, as everybody

knows, we are experiencing the most

serious inflation in three decades and

because those who did best at

predicting it did so by looking at what

was happening to the money supply

in the context of the huge

quantitative easing response to the

pandemic by central banks, including

the Bank of England.

When the pandemic struck and the

Bank responded by cutting interest

rates to 0.1 per cent and unleashing a

new round of quantitative easing —

the £450 billion in response to the

pandemic exceeding the amount

undertaken over the previous 11 years

— growth in the broad measure of the

money supply accelerated. Annual

growth in the “broad” M4 money

supply measure, 4.5 per cent in

February 2020, quickly responded to

the additional QE. By the summer of

2020, annual money supply growth

was more than 12 per cent and by early

last year it had exceeded 15 per cent.

This rapid growth in money supply

led monetarists such as Tim Congdon,

the veteran economist of the Institute

of International Monetary Research,

to warn of the inflation to come,

though much of his focus was on the

even more rapid monetary expansion

in America.

The money supply is not, it

should be said, high on the

agenda of the Bank of

England. Look

through its latest

Monetary Policy

Report and you

will search in

vain for a

mention of M4

(the money

supply measure,

not the

motorway). The Bank’s focus, based on

the amount of spare capacity in the

economy and the extent of “terms of

trade”, or imported, inflation, is

elsewhere.

Maybe, however, it should look

more closely at those money supply

figures, even if it is sceptical about the

link between them and inflation. This

is because, after the surge, growth in

the money supply has slowed sharply

and is set to subside even more. In

December, according to figures

released this month by the Bank, the

annual growth in M4 was 6.4 per cent

and its annualised growth over the

latest three months was 4.4 per cent,

so back to pre-pandemic levels. The

Banks’ recent decision to switch from

QE to QT, quantitative tightening, to

reduce the size of its balance sheet

and run down the stock of assets it

acquired under QE (mainly UK

government bonds, gilts), will

reinforce this trend.

Monetarists might say that we are

not out of the woods yet, in that we

have not yet seen the full

consequences of the earlier money

supply surge. There were, it was

always said, “long and variable lags”

between money supply and inflation.

Even with this caveat, however, high

inflation will be temporary, if painful,

rather than permanent and ingrained.

Much more important in terms of

global inflation is America’s Federal

Reserve and it has not yet switched

from QE to QT, though it has

signalled its intention to do so,

together with a succession of interest

rate rises.

Monetarism, as noted, has not

guided economic policy since the

present chancellor was a toddler,

nearly four decades ago. Then, and

even more now, most economists

turned up their noses at it.

Fortunately, and this is the

good news, you do not have

to be a monetarist to

believe that while

inflation is heading

higher over the

next few months, it

will peak and then

fall and in the

second half of the

year will be on its

way down.

Surveys suggest

that supply chain

difficulties, which

generated upward

pressure on prices as the

world economy bounced back after

the pandemic, are starting to ease.

That will not happen immediately,

but it will over the next few months.

Energy prices are sky-high and the

cost of petrol is at a record, but it

would be a huge surprise if we saw

anything like a repeat of this April’s

54 per cent increase in the energy

price cap in 2023. There may be a

further increase in the cap in October

this year, but it is not clear whether it

will be bigger or smaller than the

12 per cent increase in October last

year.

A Russian invasion of Ukraine

would mean an even bigger spike for

international gas and oil prices and a

higher inflation peak, but the negative

impact of this on business confidence

and economic growth would reinforce

the likely temporary nature of the

peak.

Elsewhere, some of the temporary

or “transitory” elements of the

inflation surge will begin to drop

away. I would wager that we will not

see a repeat this year, or anything like

it, of the near-29 per cent rise in

second-hand car prices during the

course of last year.

None of this means that the next

few months will be comfortable for

squeezed households or businesses

dealing with higher costs. An

expected inflation peak of between

7 per cent and 8 per cent is

uncomfortable, too, for a tax-raising

government and a central bank

charged with keeping the inflation

rate at 2 per cent.

It is also important to remember

that falling inflation is not the same

as falling prices. Though energy

prices should come back down again,

which would fit past experience and

the futures curve for gas prices, their

unpredictability means it would be

unwise to rely on it.

For other prices, including food, we

may have reached a permanently

higher level of prices. Supermarket

price wars appear to be a thing of the

past, for now at least.

There is, however, still reassurance

that high inflation does not appear to

be here to stay. And

that is a source of

comfort we may

need over the next

few months.

‘‘

’’

David Smith is Economics Editor of

The Sunday Times

[email protected]

Natalie Ceeney is a non-executive

director, and writes in her personal

capacity

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