Prosecuting the cost-of-living crisis perpetrators

      M’lud, I am here to present the argument for the prosecution…‍

I have blogged about the cost-of-living crisis here before, but given the context of this morning’s inflation figures and the recent wranglings around why this has happened and who is to blame, I thought I would explore, for each potential guilty party, the case against them. 

      Firstly, your honour, allow me to set out the facts of this case…

But first, a little context. This morning, inflation reached another generational high - 9%. (The last time the CPI measure was above 8% I was at school!) On course to head past 10%, we have to go back to the 1970s for the last period of double-digit inflation in the UK.

We wrote this a little while ago to explain the background of why we’re having a cost of living crisis. There are a number of factors at play:

• Rising energy prices (see my blog here) and their onward ‘input impact’, increasing other prices.
• A tight labour market, I.E. fewer people than jobs, represented by low unemployment and rising wages (which have been spectacular for those in certain professions like software engineers and lorry drivers). This has been caused by a variety of factors including changes in migration patterns due to Brexit, as well as reduced labour market participation after Covid.
• The Bank of England’s monetary policy on interest rates and printing money (quantitative easing, or QE). In the UK and most western economies we’ve had a very sustained period of low interest rates (designed to stimulate economic activity), as well as quantitative easing, which pulls up the prices of assets by putting money into the economy. That was particularly pronounced during Covid, but it has been going on since 2008 and the last financial crisis.
• Low interest rates and rising property prices have also led to increasing levels of mortgage debt, some of which has been used to fund consumer spending, which increases prices by increasing demand.
• To add to all of this, the tax burden has been rising (rises in NI, freezes in tax thresholds which pull more people into higher tax bands in a time of inflation, and various other measures).

So, as the finger-pointing begins in the press, let’s try to summarise who could actually be blamed for what and why. Of course, part of the problem is that different people think different things are the problem, but here goes. (I’m not a big fan of blame games more generally, but let the trial commence!)

      M’lud, allow me now to present the case against the Bank of England…‍

The Bank of England was responsible for a huge amount of quantitative easing pumped into the economy over the last decade or so, which only accelerated during the pandemic. Peak QE was nearly £900B of assets held (mostly government bonds). This was only stopped in December 2021. Interest rates didn’t start to rise until the same month, even though the housing/crypto/asset bubble was very much in full swing.

With all of the data and expertise at the Bank, until 5 months ago they were still pushing in the opposite direction to the one that they are now. They admitted that they had misjudged labour market conditions (they had missed that the pandemic would reduce labour market participation, and that ending furlough wouldn’t cause unemployment, which to be fair was not an uncommon view). 

A further accusation would be that the BoE hasn’t done a great job of fostering market confidence in their ability to control inflation (which is important because the expectation of inflation begets inflation). For instance, just this past week Andrew Bailey was essentially saying that inflation was outside of his control. Even if that’s true, confidence in the institution that controls inflation is part of the control that they exert. Of course, the government seems to want to throw the BoE under the bus to deflect criticism from themselves, so let’s deal with them next…

      Your honour, I proceed now with the case against the current Government…‍

It was the Government that chose to empty its coffers during Covid, triggering the increase in QE (QE lowers borrowing costs for the government, useful when its borrowing massive amounts). Evidence suggests that other countries more successfully navigated the Covid period without taking on the same level of debt. The Government has compounded this mistake by raising taxes on private individuals – seeking to recoup some of this money and dampen demand pull inflation – but they are actually just punishing people who now genuinely can’t afford to heat their homes. 

I feel like Ed Milliband here: why haven’t they just taxed the now massively profitable energy companies? The government is responsible for the energy cap and hasn’t intervened in any meaningful way to help households, particularly poorer ones. The argument would be that they are simultaneously responsible for the inflation, and responsible for the reaction that is going to knock the economy into a massive recession. Everybody knows that in good times you raise personal taxes and bad times you lower them, yet on the precipice of the biggest economic crisis of our lifetimes the tax burden has not been higher since the 1940s. (Ed Milliband doesn’t quite agree with this bit – I think he’d have it higher still, which strikes me as a bad idea, but I think there’s probably a more nuanced bit about where the burden falls for people to debate…). 

If you want to go further back, this government misjudged the implementation of Brexit (wasn’t the only economic reason for putting up barriers to your largest trade partner that you were going to have lower taxes and still keep relevant skills-based migration?) which (partly) caused the problems in the labour market. They’ve also failed to regulate the current warped housing market where foreign investors, oligarchs and second home owners help push up the prices, forcing higher indebtedness amongst the population, a lack of savings, and a debt bubble that is at perilous risk of bursting. 

      Let us turn our attention, M’lud, to the case against that great ‘deus ex machina’ known as ‘force majeure’ – no person, that is to say, but fate herself…‍

There was a war in Ukraine – which caused the energy price spike, which then caused turbocharged inflation. Who could have predicted that Putin would actually start a war with Ukraine? And who could have predicted that the international community would actually not let him win quickly, by funding the Ukrainian army and reducing spending on Russian products, thereby extending the economic impact to the western world? This feels like the argument that the BoE have made – that inflation is a once-off spike caused by an energy price rise, and not one that requires higher rises in interest rates. This is the ‘just wait until this war-driven energy spike is over and you’ll see this isn’t really a big problem’ argument. As one civil servant told me recently:  this is a great argument, until you realise it’s wrong, at which point everything is really messed up (he didn’t use that last word, but I don’t want to type what he did say – after all, this is a courtroom).

      And finally, your honour, I offer the case for blaming someone or something else, otherwise known in the legal jargon that bedevils our profession as the ‘clutching at straws’ case….‍

Lee Anderson MP would perhaps suggest that if we all just knew how to cook there would be no cost of living crisis because meals would only cost 30p. Rachel Maclean thinks that if citizens just worked harder and got better jobs things would be ok, and a Bank of England governor thinks that if workers didn’t ask for pay rises the whole thing would go away. Which conveniently forgets that people of limited means have, understandably, a tendency to act in their own self-interest.  Of course, it’s great when folk who earn big six-figure salaries and have received pay rises recently lecture people who earn far less than them not to ask for a pay rise. That’s brilliant. Please sirs, can we have some more?

     And so, in conclusion, your honour…

Ultimately, it doesn’t really matter whose fault it is. It’s hard enough just to work out why we are where we are. Economic systems are complex and hard to predict. That's why economists have jobs and also why they often get their predictions wrong. What really does matter is the impact on households. Lots of people are going to experience a drastic reduction in their standard of living over the coming months and years. If interest rates rise, people who stretched to get on the housing ladder recently will get evicted from those homes. 

Whilst the politicians don’t want households to reign back spending, it’s really the rational answer on an individual level for many people. If you’re thinking about this problem, the first step is to know where you are, and how this is already affecting (or will affect) you. And then it’s important to make sure that you’re not paying a penny more than you need to for the right household provision. Because things are not going to be pretty over the coming months.

At Nous.co we’re building a library of useful information to help UK households manage the cost-of-living crisis, and make life simpler and fairer. Nous Knows tells you everything you need to know about all of the ‘boring’ things that we all spend lots of money on, including how to make sure you don’t pay too much, and a handy method for saving money. We’ve also been keeping tracks of all the games that providers, AKA Price Bandits, play to take money out of consumer pockets.

Follow us on Twitter for the very latest commentary, news and advice on navigating the cost-of-living crisis.

      With that, M’lud, I rest my case.