the times | Saturday April 9 2022 51

Business

David Wighton

Addressing supply rather than demand

• and vice versa - is not the answer

prices in the year to February. In the

private sector, employers are

grappling with some acute labour

shortages that are driving up wages.

Some of these shortages have been

exacerbated by Brexit, but the

government has been very reluctant

to ease the pressure with targeted

relaxation of immigration controls.

Where it has done so, in the case of

butchers for example, its concessions

have been so limited that the impact

has been laughably small.

In the battle against inflation, it is

interesting to compare the

approaches adopted on either side of

the Atlantic. Although President

Biden has talked much more about

tackling the supply side than the UK

government, he has proved almost as

reluctant to pull any of the levers.

Loosening immigration controls

would be an obvious one, but it is just

as politically sensitive in the United

States as it is in Britain. Another lever

would be to ease regulations that

increase business costs, but this has

limited appeal for a Democratic

president hemmed in by vested

interests.

You would think it would be much

more up the street of a Tory

administration committed to

removing red tape. Yet the

government’s key regulatory decision

in recent months was to backtrack on

proposed reforms to planning that

would have significantly reduced

costs for developers (if not house

prices). As for the promised

deregulatory dividend from Brexit,

don’t hold your breath.

Larry Summers, the economist and

former US Treasury secretary, argues

that another option for Biden would

be to tackle the economic disparities

between regions in the US, some of

which are booming while others

stagnate. If activity could be shifted

from “red-hot places to stone-cold

places”, this would reduce the

pressure on prices for a given level of

demand, he says.

This is a reminder that the UK is

not the only country that suffers from

the regional economic inequality that

Markets are about

the balance of

supply and demand,

so it is odd that the

government’s

approach to two big issues — energy

and inflation — has been so one-

sided. On energy, critics rightly

slammed this week’s energy security

strategy for focusing on supply with

little new on curbing demand. On

inflation, it has been the opposite. The

government has largely left it to the

Bank of England to temper demand

by raising interest rates. The supply

side has been mostly ignored. For a

government with a very un-Tory

inclination to intervene, this is

curious — and very short-sighted.

True, there are relatively few levers

on the supply side that governments

can pull that will have a big impact on

inflationary pressures in the short

term. The surprise is that ministers

have eschewed even those.

Nobody is expecting the

government to impose controls on the

prices of goods or labour, but

ministers could at least urge

companies and workers to hold back

on increases. Instead, Downing Street

slapped down Andrew Bailey after the

Bank of England governor urged

restraint in wage bargaining. “We

want people’s wages to increase,” the

prime minister’s spokesman said.

In truth, it is doubtful that calls

from ministers for restraint would

have much impact. Warnings to

businesses might be more effective.

Companies are nervous about the

potential backlash from price

increases and ministers should

capitalise on this. It is not business-

bashing to ask companies to show

temporary restraint to reduce the risk

of an inflationary spiral that would hit

hardest the most disadvantaged in

society. Of course, it doesn’t help that

the government has just increased

companies’ labour costs by raising

employers’ national insurance

contributions.

The big worry is that higher costs,

particularly of energy, will feed

through into higher wage settlements

in a labour market with low

unemployment. In the public sector,

the government looks set to impose

another brutal pay squeeze by

keeping increases well below inflation.

Its recent evidence to the teachers’

pay review body proposed a 3 per cent

rise for experienced teachers,

compared with the 6.2 per cent rise in

War pushes

global food

prices to

record levels

Louisa Clarence-Smith,

Chief Business Correspondent

Global food prices rose by 13 per cent to

a new record high last month as war in

Ukraine caused turmoil in markets for

staple grains and vegetable oils.

The food prices index published by

the United Nations’ Food and Agricul-

ture Organisation, which tracks the

most globally traded food commodi-

ties, measured 159.3 points after record-

ing its fastly monthly rise in 14 years.

Prices for vegetable oils, cereals and

meat all hit records, while those of

sugar and dairy products also rose

sharply.

The world is facing a grain shortage

as the conflict disrupts the supply of

wheat from Russia and Ukraine, which

together produce more than a quarter

of the world’s wheat and a fifth of corn

exports. Beth Bechdol, deputy director-

general of the UN organisation, said: “If

the conflict in Ukraine results in

prolonged reduction of Ukrainian and

Russian exports, it will further exacer-

bate food and fertiliser price increases,

putting at risk food security of many

countries.”

The price of cereals, including wheat

and coarse grains, rose by 17.1 per cent in

March, according to the agency. It has

cut its estimate of world wheat produc-

tion in 2022 to 784 million tonnes from

a forecast of 790 million last month to

take account of the possibility that at

least 20 per cent of Ukraine’s winter

crop area would not be harvested.

It also lowered its projection of global

cereals trade in 2021-22 as disruption to

Black Sea exports were only partially

offset by increased exports from India,

the European Union, Argentina and

the United States.

A 23 per cent rise in vegetable oil

prices was driven by higher sunflower,

palm, soya and rapeseed oil prices.

Russia and Ukraine account for 80 per

cent of the global supply of sunflower

oil. With exports from those regions cut

as a result of the conflict, demand has

risen for alternative oils, including

palm, soya and rapeseed, pushing up

prices.

The meat price index rose by 4.8 per

cent in March to a high of 120 points.

The price of sugar rose by 6.7 per cent in

March, according to the agency, reach-

ing levels more than 20 per cent higher

than those recorded in the same month

last year. Global dairy prices rose by

2.6 per cent in March, marking the

seventh consecutive monthly increase

and lifting the index 23.6 per cent above

its value a year ago.

Boris Johnson is trying to address

with “levelling up”. Yet virtually no

reference has been made to levelling

up in the context of inflation. Instead

of wasting time with stunts like

privatising Channel 4, the

government should crack on with

levelling up, including the shift of

more public sector jobs outside

London and the southeast (something

that Channel 4 has done rather

effectively).

The lack of interest in supply side

responses may reflect confidence (or

complacency) within government that

most of the cost pressures are

temporary and that the Bank of

England will be able to tame inflation

without too much trouble. To be fair,

most independent economists seem to

agree with this outlook for the UK,

whereas in the US there is growing

concern that Summers is right and

that inflationary pressures mean

interest rates will have to be raised so

sharply that it triggers a recession —

and a fall in share prices.

Yet some influential voices are

arguing that the whole world may be

on the cusp of a new inflationary era.

Agustín Carstens, head of the Bank

for International Settlements, known

as the central bank for central banks,

warned this week that new pressures

were emerging, particularly in labour

markets, and that structural factors

that had kept inflation low in recent

decades may wane as globalisation

retreats.

If this is right, it makes it all the

more important for the government

to address supply side constraints that

limit the ability of the economy to

grow without generating inflation. In

addition to short-term measures, this

means more investment in

infrastructure, innovation and skills

that will strengthen the productive

capacity of the economy.

Successive governments have

talked about all these things, but the

delivery has never matched the

rhetoric. If we really are entering a

new inflationary era where we can no

longer rely on ultra-low interest rates

to keep the ship afloat, it becomes

even more vital to

tackle the long-

standing weaknesses

of the British

economy.

‘‘

’’

David Wighton, a former business

editor of The Times, is a columnist

for Financial News