Just when it seemed we were about to escape from the Covid dystopia, it’s only come back to hit us in a different form: inflation.
Estimated by the Office for National Statistics to now be hitting 4.2 per cent in the year to October – the highest rate for almost ten years – this is going to have a serious impact on ordinary people. With it estimated that households will be more than £1,000 a year worse off, or £20 a week, for at least the next few months the British people are in for a tough time.
So how is this related to Covid? Well, the understanding by most economists is that this surge in prices is being caused by the rapid bounce back in the global economy as countries emerge from lockdowns. The problem is supply chains haven’t been able to increase their output at the same rate. Hence the almost doubling in prices for commodities such as timber and the 13 per cent rise in the cost of plastic for doors and windows.
As everyone is inevitably currently experiencing, the increases in the price of energy are causing households the biggest problem. Most notably, petrol prices are up over 25 pence and the cost of gas up 28.1 per cent following the energy regulator Ofgem’s decision to raise the price cap.
Suffering most of all though are businesses, who with no protection from the gas price cap, are having to absorb all the wholesale cost – up about 250 per cent since January. Without a change in the direction of travel soon some may have to begin winding down production.
With mostly global origins, what can the Government do about this then? Well, pulling the levers they do actually control would be a start. For example, VAT is currently levied on energy bills at a rate of 5 per cent. Given the Leave campaign promised this would be scrapped following Britain’s exit from the EU, there has never been a more apt time to deliver.
The Bank of England also has a role to play. Tasked with keeping inflation at around 2 per cent, they are clearly missing this target at the moment. Given that there is growing evidence this rise in inflation is not merely transitory, the time has come, therefore, for the Bank to fulfil its mandate by slowly increasing interest rates, something that would have the added benefit of helping tackle the overheating housing market. Risking anything like a recurrence of the wage-price spiral which blighted the 1970s is simply not worth it.
Most of all though it is in the area of personal taxation where the Government needs to reassess. Instead of attempting reform for the NHS and social care first, the planned 1.25 per cent increase in National Insurance contributions for workers and employers is simply unacceptable in the present circumstances. Likewise with mooted plans to retroactively increase the tuition fee contributions of poorer graduates.
If it is beyond ability of the Government to make things better, at least they should not be making things worse.