John Maynard Keynes wrote, when considering the great inflationary episode of the first world war, that “no one benefited except the profiteer. The seeds of much subsequent trouble were sown. And we ended up with a national debt vastly greater in terms of money than was necessary and very ill distributed through the community.” That is where Britain finds itself heading. Keynes’s penetrating analysis is now ringing through Whitehall and beyond.
When Jeremy Hunt sits down with industry regulators on Wednesday, he will need more than soundbites to make companies stop fleecing their customers. Mobile and broadband companies have just pushed through the biggest price rises for 30 years. And when the Organisation for Economic Co-operation and Development looked this month at whether workers, businesses or governments had contributed most to inflation, the data showed that, for the first time since the pandemic, businesses were most to blame in the UK.
There are two very different notions of inflation that are often lumped together. In the first case, all prices, including the nominal wage rate, increase together, but the real wage rate remains unchanged. In the second case, prices increase relative to the nominal wage rate, resulting in a fall in real wages. Keynes classed the former as “income inflation” and the latter as “profit inflation”, which is what many advanced economies face today. Gita Gopinath, the deputy director of the International Monetary Fund, warned this week that “if inflation is to fall quickly, firms must allow their profit margins – which have shot up during the past two years – to decline”.
Keynes would be appalled by how little interest western governments have in redistribution and how happy they are at playing the game of winner-takes-all capitalism. As the latest IMF research shows, rich-world firms have been more protected from the adverse terms of trade shock than wage earners. One reason, says the IMF, “is that prices are more flexible than wages – firms are able to adjust prices quickly to shield their profitability”.
Britain’s current inflationary episode is as much about corporate power as profiteering. In this respect, the UK government is responding inappropriately to the social needs produced by the current situation. If profits are too high, they ought to be taxed, and state spending increased relative to national income, to put money in workers’ hands. The economist Bill Mitchell says that Japan’s success in bringing down inflation can be explained by further relaxing fiscal policy “to deal with the cost-of-living crisis – [providing] fiscal transfers to households and subsidies to business as part of a deal to compress profit margins”. An alternative strategy might be to follow the French government, which has threatened food producers with financial penalties if they do not lower prices.
UK ministers can say that the government could do little about the inflationary blow of the Ukraine war. But they are propagating the price shock wave by cutting government energy support, backing a redistribution of income from poor to rich through rate rises, and doing little about the predatory power of big business. The puzzle is not why the public is worried, but why ministers cannot see the problem.