How much more inflation will it take to get the Monetary Policy Committee to notice it? The recent producer price numbers show increases of more than 13% in the costs industry is incurring, and inflation of output prices by almost 5%. As a contributor to this site has asked, what is the point of the MPC other than to prevent this kind of thing happening?
The Bank’s defence is that it cannot be expected to offset increases in world commodity prices, including oil, metal and food. It sees these increases as outside their control, and assumes they will subside as quickly as they came about. The Bank slides over the role of weaker sterling in increasing our prices, ignores the fact that other western countries facing similar increases in world commodity prices are not experiencing the same increases in their general price level, and glosses over the period of more than a year now when they have been saying this is temporary.
I have a further worry. Maybe these commodity price rises will come to an end when the US stops printing dollars, and as the Chinese and Indian monetary tightening has more impact. The UK, however, faces structural price rises in energy costs in the years ahead, as it brings in the full carbon price regime and more expensive ways of generating electricity. The whole of western Europe faces higher costs of doing business, as the regulators introduce many more ways to make manufacturing in the EU dearer.
The UK government wants to rebalance the UK economy, placing greater emphasis on making things. Last year we imported £96 billion more goods than we exported, so there is plenty of scope to do so. British business could both sell more abroad, and replace more of the imports with domestic production.
Quite often people think the difficulty in the UK is relatively high wages. For much modern manufacturing wage cost is not the main issue. Processes are highly automated. It is the costs of bought in materials and energy that are more important. Location decisions rest on transport, power and access to materials, as well as the ability to recruit a good workforce.
To bring about the transformation of the UK economy the government seeks, with bigger and stronger industry spread out around the country, business needs access to plenty of good value power, good transport for exports and imports, and access to plentiful capital to buy the plant and machinery needed.
There is more to be done in all these fields. A local company recently asked me to intervene with the power utility to get access to the amounts of power they needed – and that was not process industry burning large amounts of energy.
Hitting our carbon taregts by exporting more of our energy intensive industry to places where energy is cheaper neither saves the planet nor transforms our economy.
The deficit reduction measures are already having an impact on real incomes, as this year all the strain has been taken by the private sector through a series of tax increases. Next year the slower rate of growth of current public spending does bring some areas of reduction, to offset the more rapid growth in the preferred programmes. The degree to which the cuts do damage depends entirely on how the public sector manages the change from rapid growth in cash spending to slower growth in cash spending.