On top of an acute inflationary environment, we now have a European war thatwill take it to a new level. I believe the UK economy is on the brink ofstagflation – a combination of persistent high inflation, a stagnant economyand increased unemployment. Keeping jobs will be critical.
The effect of the conflict on global commodities and fuel is obvious. Butsoaring costs of labour, transport, feed, fertiliser and more have a knock-oneffect on agricultural yield, which can wipe out jobs all the way through theindustry.
Many of us haven’t experienced stagflation in our working lives. It was lastseen in the UK in the mid-1970s after the OPEC oil price shock. Supply waslimited and prices went through the roof, driving inflation to 26% – a figureclose to predictions from the UN food agency today. The ensuing wave ofdisruption wiped out business viability with the effect of increasedunemployment.
Normally, price increases benefit both retailers and suppliers by generatingmore cash profit, but consumer demand must not be suppressed so as to negatethe effect of the increases. As input costs are rising uncontrollably andconsumers simply can’t pay more, the effect on the elasticity of demand isgreater. The point at which price increases choke off demand will come soonerand threaten business viability. This path is predictable here and now.
Stagflation combines the worst outcomes of a recession with higher prices forconsumers and can create a situation where things quickly spiral into fewerjobs and lower wages. This is very costly and difficult to solve. Central bankshave to reduce money supply without hurting families too badly, and keepinflation low. At the same time, they must encourage businesses to hire staffto keep unemployment down. The forces at work here prevent both. Already thenumber of households in financial difficulty are increasing – many withunsecured loans, lower incomes or unemployment. Inflation prevents them fromcutting back, so they will default on rents and mortgages.
As the Bank of England is unable to control inflation by reducing interestrates, which are already rock bottom, you’d expect it to go down the route of aquantitative easing (QE) programme to protect spending and jobs. However thepandemic crisis saw the Bank double the existing QE to £895bn, with no obviousexit visible and pressure from the House of Lords to stop this “addiction toprinting money”. Damage to the economy seems inevitable.
Solutions go beyond Russian vodka boycotts. We need to recognise this is awatershed moment – it is not business as usual. Be clear on the changed demandelasticity of products, cut costs of production and protect jobs, even if itmeans wage cuts.
Economic discussion during a time of human tragedy may seem uncomfortable, butwe all have a responsibility to ensure our companies survive. One option is tobet your savings on the growth of Aldi and Lidl shares.