Thursday, 21 July 2016

Likely inflation jump will hit the poorest 10% of the population twice as hard as the richest

Pre-Brexit things were just starting to look good.  For me as a local government employee l was pleased about a 1% per year pay deal that was going to provide a real terms pay rise to claw back losses since 2008.  a 1% pay rise looked pretty good in a world of 0.5% inflation.

The 12% drop in sterling post the brexit vote has already caused fuel costs to start rising and inflation is now expected to increase quite rapidly.  Forecasts of 3% inflation now by the end of 2017 are common.  This is coupled with a forecast drop in economic activity caused by businesses and consumers being nervous and worried about the future.

The two things combined have raised a spectre we haven't seen since the 1970s, "stagflation".  Stagflation is economic stagnation (recession) and rising inflation combined.

Workers won't have a lot of muscle to shift pay increases above the current 2% level if the economy is shrinking.  Inflation rates of potentially 3% per year by the end of next year will therefore hurt.  For public sector workers on a 1% for 2 years pay deal, this will really hurt.

Things will be worse for people on benefits - a number of benefits are to be frozen for four years.; other benefit changes will create real-terms cuts, e.g. the lowering of the benefits cap.  The IPPR think tank estimate that an inflation jump will hit the poorest 10% of the population twice as hard as the richest.  At the pre-brexit inflation rate of half a per cent the impact of benefit changes were mitigated.  A 3% inflation rate will cut a much bigger hole in the value of benefit payments in real terms.

The only group to be insulated is pensioners.  The triple lock guaranteeing them a minimum of wage inflation, price inflation or 2.5% would kick in.  However, Cameron did say the triple lock might be unaffordable in the aftermath of Brexit...The International Monetary Fund estimate that even in a good brexit scenario public borrowing will rise by 0.7%.  This implies that Brexit rather than saving the government £350M per week, will cost it £270M per week.  With these kinds of costs needing to be met Pensioners may need to watch out too.

The only scenario for lower inflation played out by the IMF in its latest forecasts is if economic activity crashes badly enough that it will dampen inflationary pressures!  However, this is hardly a good news story either.

If only people hadn't wanted to meddle with something which was actually working reasonably okay - but don't get me started on that one!