Avaricious corporate executives, pushy unions, Covid, Vladimir Putin, Brexit voters, central bankers and global warming. All have been blamed for the high inflation that has reduced our living standards.
But how much truth is there in these accusations?
Just like an Agatha Christie country house murder mystery, looked at in a certain way, everyone appears suspicious. Price stability is dead.
Whodunit?
As we all know, the earliest suspects, while not entirely innocent, are seldom guilty. Let us look at them.
The earliest wave of inflation arose from Covid. Supply chains fragmented. Fewer microchips meant fewer new cars and other durable goods.
During 2021, some used cars cost more than showroom prices as no new ones were available. That wave has been and gone. When central banks talked about inflation being transitory, let us generously believe they were referring to this.
Then Russia invaded Ukraine and the world was hit by a sharp rise in the price of gas and stunning increases in end-consumers’ bills in Europe and other countries relied on imported gas. Transportation cost more; restaurant heating bills soared. The war also pushed up the cost of wheat, so food cost more.
Germany belatedly decided it was over-reliant on Russia and set about seeking alternative supplies of liquified natural gas (LNG) while increasing storage and reducing usage. This worked faster than expected, helped by a mild winter.
Such commodity-driven price inflation was the main worry during 2022, with governments borrowing and spending large sums to protect citizens from the worst of the price rises; the scale and timing of price caps also had some technical effects on the calculation of annual inflation.
We are still living through this inflation but current signs are that wholesale prices have been falling since the start of 2023.
Remember, headline inflation is typically reported monthly with respect to its level a year earlier.
Pound in your pocket?
In the murder mystery house, the irascible old colonel from the shires was invariably a too-obvious suspect. In our inflation story, some pointed the finger at Brexit.
Now it is true that the pound has weakened considerably since the Referendum but that was nearly seven years ago. A weaker pound does indeed make imports (and foreign holidays) more expensive, so Brexit has definitely weakened our purchasing power.
However, if Brexit was the reason for higher inflation, then the prices of traded goods ought to be rising faster than in Europe. But they are not. Inflation rates for cars, TVs, food and furniture are lower than in Germany – which has not yet left the EU.
Brexit was an act of economic self-harm, but it cannot be blamed for everything and should not distract us.
Who then?
As we look around the drawing room, our eyes light upon a suave businessman wearing an expensive aftershave engaged in a heated debate with a trade union leader wearing an angry frown.
The current company reporting season continues to reveal significant profit increases by consumer-facing companies. In a recent trading update, the outgoing boss of Unilever said the consumer goods group was not ‘profiteering in any way, shape or form’ from inflation.
