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Sunday, June 26, 2022

Inflation: There’s an Important Way to Lower It That Everyone Ignores – Increase Productivity

Inflation has become one of the biggest problems of our times. According to the most recent data on consumer price inflation, the UK is highest in the G7, weighing in at 9% per annum.

When you look at the other common measure for prices, retail price inflation, which adds mortgage rates to the equation and is calculated slightly differently, is over 11%. This is important because the RPI is used to drive up prices on a range of items from train tickets and mobile phone contracts to student loans.

The question of why inflation is so high is well rehearsed. The initial impetus came from higher demand, but is being fueled further by supply issues.

what is the cause of high inflation

On the demand side, quantitative easing (QE) during the pandemic – in which central banks “made money” to help prop up the economy – has increased the amount of money in the system by more than 20%.

When the lockdown ended, it helped ensure that there was an increase in demand for goods and services: for example, retail sales grew by more than 20% annually in May 2021, and nearly 10% in January 2022. reached another peak. At the same time, firm demand helped drive huge price increases in key industrial goods such as copper and steel. In addition, oil prices have increased by about 67% in 2021 and 20% in 2022.

The increased demand on the global supply chain has been hit by constraints on the global supply chain from social distancing, self-isolation rules and renewed lockdowns in China. As a result, the cost of shipping freight is about 35% higher than at its pre-pandemic high (and 700% higher than its low). And all this before discussing the war in Ukraine.

The Bank of England’s response has been to raise the key interest rate from 0.1% to 1% and halt QE. Tighter monetary policy affects demand as interest on multiple loan repayments is rising and the cost of borrowing is rising. As a result, the GfK UK Consumer Confidence Index is sitting at -40, a historically low level (when the number is positive, it means consumer confidence is high).

This combination of higher interest rates and higher prices has increased the chances of a recession. In part, this is because rising interest rates discourage businesses from investing. But there’s another problem with discouraging investment: it’s part of a long-term solution to our inflation problem.

productivity and investment

This ties in with the UK’s long-term problem with productivity: in other words, how much each worker produces. The UK’s productivity rate is increasing, which you would expect as technology improves, but growth is lower than that of major international competitors such as the US, Germany and France.

While the rate of growth has returned to pre-pandemic levels after declining during the lockdown, it is still slower than in the years before the global financial crisis of 2007-09. A 2019 PwC report reported that the annual growth in UK productivity was 2% for the ten years to 2008 and 0.6% for the ten years thereafter, with Germany accounting for about 10% and the US over 30%. There was a difference.

G7 Productivity Growth, 1997-2021


Why does productivity matter to inflation? When a workforce is more productive it produces more goods and services, and at a lower cost per unit. This means there is a greater supply of these things, which puts downward pressure on prices and is therefore associated with lower inflation.

How do we increase productivity? One important way is to invest more, but this has been a weakness in the UK. Business investment stalled in 2016 following the Brexit referendum, fell with COVID-19 and remains nearly 10% below 2019 levels. The country’s investment spending as a ratio of GDP (16.7%) compares poorly with the US (22.5%), Japan (25%) and the European Union (24.3%). This is despite evidence that UK companies have £140 billion in cash and a backlog of accumulated projects.

what can be done

The question is how to incentivize firms to release this investment potential. The government is planning to increase the headline corporation tax from 19% to 25% in 2023, which is not going to help and must be scrapped. To further encourage investment, more liberal rules are needed around tax relief, including increasing the “super-deduction” brought in two years ago, which could reduce companies’ tax bills by up to 25%.

Young Woman In Hard Hat And Hi-Vis Working In A Factory
Better apprenticeship is important for productivity.
Quality Stock / Alamy

Along with encouraging companies to invest and expand, the government needs to encourage people to start new companies. For example, the UK has lost three-quarters of a million self-employed workers since February 2020.

To encourage more start-ups, the UK government, evolving administration and councils need to come together to develop strategic plans for different sectors. This includes making better use of universities as local hubs for expertise and developing groups of similar firms based on local specialties that can help each other by sharing tools and collaborating. Plans exist, but action is needed; Leveling up should be more than a catchy slogan.

Public investment needs to be part of the picture. This includes education especially in both schools, where advanced facilities are needed to ensure that young people are fully trained in the latest technology; and for those over 18, with a clear balance between university and apprenticeship training.

Crossrail has made it fairly easy to get from east to west in London, but from Leeds to Manchester or Edinburgh to Glasgow, elsewhere remains annoying. Accelerated transport links improve the mobility of goods and labour, while actually upgrading internet connections (full fiber and 5G) improves links when travel is not necessary. Both improve productivity.

Inevitably, these types of interventions involve high costs. But it should be seen as a long-term solution. After WWII, government debt was over 200% of GDP and took 50 years to pay off. The same time scale can now be considered.

UK Chancellor Rishi Sunak has been talking a lot about the need to unlock investment and increase productivity, but there is still little detail about what the government intends to do. There are a lot of economic benefits to increasing productivity, but reducing inflation is something everyone has missed out on.

World Nation News Desk
World Nation News Deskhttps://worldnationnews.com/
World Nation News is a digital news portal website. Which provides important and latest breaking news updates to our audience in an effective and efficient ways, like world’s top stories, entertainment, sports, technology and much more news.
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