Inflation: what is it and how does it affect society podcast

Transcript

Inflation: what is it and how does it affect society

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Thomas Creighton (TC): Hello, welcome to the Emerald Podcast Series. My name is Thomas and my guest today is James Connelly. He is an Emeritus professor at the Faculty of Business Law and Politics at the University of Hull in the UK. He is the editor in chief for The International Journal of Social Economics published by Emerald. So hello, thank you very, very much for joining me.

James Connolly (JC): It's a great pleasure to be here. Looking forward to it.

TC: Me, too. So today we are talking about inflation. Somebody who's seen in the news a great deal recently.

JC: Indeed, I mean, it's a fascinating topic, partly because it affects everyone. But as we'll see, in a moment, it affects different people differently, which is also part of its fascination.

TC: Absolutely. So I thought let's first of all start with a definition. So what is inflation?

JC: Well, as a broad term, you might say it's the rate at which prices are rising over a given time. And it's not just about a one off price rise. That happens, it's about a relatively consistent rising and the general level of prices over a period of, say, months or years. So you can have years of inflation, but you wouldn't talk about days of inflation. That would be because you don't know where it's going to go next week. But if you have a consistent upward trend in prices over an extended period of time, you'd call that inflation.

TC: Okay, thank you. And why do prices go up?

JC: Well, there's a number of reasons why prices go up. I mean, some of them are straightforward, what you might call shock reasons, the war in Ukraine is a good example of this. It's not just the cost of war itself. Although wars are expensive, if you look at the Second World War, you'll notice that they had 25% inflation in 1941. And that must have been the shock of war. But the external shock of war, by which I mean, a war we're not involved in directly is to do with, for example, grain prices menu, or the supply of oil or other forms of energy. It could be it could be electricity, it could be coal, it can be oil, could be anything, where the supply is constrained by the facts, in this case war. So one reason for inflation is what we call cost push. In other words, it's the increased supply, the increased price, of raw materials, or whatever materials or, or related things such as energy, which now why should that be so important, for example, to a farmer? Well, because you're paying more to get around your own farm, you're paying more to get your products to the market, you're paying more for everything, including the inputs to your farm, if any of those are coming from elsewhere, because again, the cost of transport are going to be a higher proportion of your overall expenditure. And again, imagine you're a farmer in the Netherlands, you know, huge greenhouses, all very energy intensive. But most of our tomatoes probably come from those greenhouses, but we're going to pay higher prices for tomatoes because of energy prices increasing in the Netherlands. So those are just some examples of that dimension, of inflation. But as they say, it doesn't stop there, there's more. So what there is, as well is, of course, sometimes it's the other way around, it's not so much that the price of commodities is risen, is that we're demanding more things, we have more sort of consumer demand than there are consumables to demand if I can put it that way, now because what happens then, of course, if prices rise, good, if you can't increase the production of a good, then what happens is as price rises, and eventually that will then stabilize at a higher price. So one reason why we have that sort of thing is that, for example, in a buoyant economy, if people's wages are rising, then you might find that while you have a lag in production, in that intermediate intervening period, prices are going to rise. But you hope that the fact that prices have risen will then lead to enhanced production of that good, in which case price will stabilize and possibly even fall depending on the levels of demand. The more worrying thing from the point of view of some economist is of course, not just you know, high demand in an economy is what you might call money lead high demand in an economy that is, you know, the old notion of printing money, too much too many pounds chasing too many goods, too few goods, I should say. That sort of thing. So this is why people are always wary of increasing the supply of money in an economy. But I should point out that that is not an invariable problem. And it depends on a number of things. So one has to be careful with all of these explanations of inflation, I think, because almost invariably is what you might call a multifactored series of causations.

DC: Thank you very much. And you mentioned some of those shocks, which can affect the economy in the short term, but over the long term over decades, what is the driver for inflation, say, between now and the 70s? And going back further?

JC: Yes, you raise a good question there. Because this is about comparing things over time. Sudden shocks in the price of this or that good is one thing, but  as with talking about this, in the context of social economics, we should be aware, or be aware, I should say, of all of the social factors that are important here. And by that I mean, things to do with the workforce. I mean, things to do with government policy, I mean, things to do with how work is organized, I mean, things to do with trade unions and so on to do with relative worker power, as opposed to the power of the bosses if you want to put it that way. So for example, when we talk about inflation, sometimes people start talking about the spiral effect, where, for example, workers might be petitioning for higher wages, because the retail price index, or whatever measure of inflation we're using is going up. But then the problem is, it's often said, if they are chasing after that, the very fact that they get higher wages, increases input costs, which then puts the RPI up, which then means that they're chasing after the next highest level. So you get into an inflationary spiral. And when you're talking about the inflation of the mid 1970s, I'm talking here about the United Kingdom.

That is more or less what happened. But it doesn't follow that the trade unions caused the initial inflation, but they might have contributed to the spiraling effect of it once it had happened. And this is why the so called social contract was so important, because that was a voluntary limitation on demand for wage increases. So that's an important point. But the second important point is that we're talking about the unions. Unions were strong. They had vast collective bargaining power. They were centered on large, the powerful ones, were centered on large scale industries, mining and various forms of engineering and railways and transport unions or whatever it might be. So so they could organize. And they could organize in the workplace in large numbers, which meant they had considerable bargaining power. They could speak as it were face to face, and one to one with government. But none of that is true now.  Right now, it's relatively unusual. And I think Mick Lynch of the railway workers, is the exception, is relatively unusual for people to know the names of the main union leaders, and for the main union leaders to have, to have any considerable power by comparison with the days of say, Arthur Scargill, or Hugh Scanlon, or Jack Jones, or whoever 30 or 40 years ago. So that is a huge difference, because it's unlikely right now that we're going to have that inflationary spiral in the way that you might have had it in the past.  But this also means, of course, that working people might be more adversely affected by inflation, precisely because they don't have the strong union to press their case for them. But its telling right now to observe, of course, that a lot of people, including the nurses are talking about strike action. So maybe these things don't stay the same, and it may move around again.

TC: Absolutely. So you are, of course editor in chief of the International Journal of Social Economics. So that social effect of inflation is vital to what we're talking about. What do you see as the modern kind of social effect of inflation in the UK?

JC: Well, if we're talking about the UK, I mean, I think there's a number of things that one could raise, I mean, first of all, people are used to a general inflationary tendency in the economy. And you can see this by how they speak and how they act.  So I think the idea that prices rise is something that people are used to, but of course, economists would generally say that modest level inflation is something which is a measure of a healthier economy in effect. And a modest modest house prices, for example, over time is good, you know, because you see your asset increasing in its value and all the rest of it. And so there's a sense of security, there's a sense of wellbeing and all of these sorts of things. And as long as wages are keeping up to scratch with prices, in general terms, then people, or maybe slightly earn, slightly exceeding them. So if you have inflation of 2%, or wage rises, or 3%, everyone is a little bit better off, then you have a society marked by wellbeing, for example, but what I'm seeing right now is a society marked by anxiety, and society marked by fear and trepidation, but also a society marked by a sense of discounting the future and focusing on the present. And you can see this mirrored in the things that politicians say to so suddenly, right now, people are talking about economic growth, and all the rest of it. And people are talking less exactly at the time when they shouldn't be talking more about pressing environmental concerns. Because when energy prices are your problem, the idea of

alternative sources as distinct from what people see as a quick fix by fracking or something, you think, oh, forget that, let's do something now. Now, my point is not that it's possible to do that, but that's how people think that you should be acting. And so the answer to your question is yes, I think it, it creates a febrile society, a society marked by anxiety.

And if, if I may, if I can compare with other countries, I mean, at the far end of the scale, you'd have sort of Venezuelan hyperinflation, where apparently people make handbags out of worthless banknotes you know, we haven't got that bad. Turkey, on the other hand, is an interesting mid case, because it's not hyperinflation. But there's been consistent and high inflation over the last decade or so. And what you're seeing there is a widening, increase in the problems of poverty, have problems with inequality, you have all of those sorts of things established there. But also you have a huge increase in borrowing in order to purchase now, at some point, that particular set of chickens has to come home to roost. But of course, in inflationary times, if you are discounting the future, by purchasing now because you don't want to buy in the future. So it depends, of course, what happens to wage levels and things. But essentially, if you think that wage levels will rise, then it makes sense to buy now, even on credit, even at high interest rates. So and that makes a difference to society in that sort of case.

TC: Often with inflation, we'll just get a single number, right, inflation is at a percent.  Do you think it's helpful the way we measure it now, given that, you know, well, I could even ask, how do we measure it now There's more than one method?

JH: Well, that's, that's a fascinating question, really.  I mean, the short answer to your question is that there isn't a single measure of inflation. For very simple reason, every single good in the market has its own inflation rate. And in the case of some things, personal computers, declining prices for higher power over decades, you know, but of course, that's not the only thing in the basket. And if the other things in your basket are staple items, bread will be a standard, okay, so something which is increasing in price because of wheat price shocks from the Ukraine war, for example, then you've got an interesting question, which runs like this, what do you put in your basket, in what proportions you put it in the basket so that you can measure accurately what a composite inflation rate looks like? But the key point is that you can come up with one figure. But it's not the same figure for the rich as it is for the poor. Because the price of bread features much more heavily, has much greater weight in the everyday expenditures of the poor than of the rich.

TC: Yes

JC: In other words, the poor use more of their disposable income on staple items, such as food, and when the price of food goes up, they can't avoid buying it. Which means they don't care about the price of bloody laptops, and they don't care about whether Lamborghinis or Porsches have gone down in price, that makes no difference. What matters is whether the price of bread has gone up in price and

so inflation, typically adversely affects the poor, more than it does anyone else. That tends to give rise to greater inequalities in society. Because if you're spending all your money, you're certainly not saving it, for example.  But in addition to that, just going back to the general point, it's a very difficult question, how would you come up with this composite measure. So for example, the Retail Price Index includes housing costs, the Consumer Price Index doesn't, but there is a version of that called the Consumer Price Index H, which does, but in a slightly different measure to the retail price index. Now, I'm not going to get too deep into this. What I'm saying here is that the choices are very largely political, money, and inflation, they're not neutral. You know, we have political choices here, we have ethical choices here. And let me tell you what I mean. So for example, the government when it starts putting up the price of railway tickets does it by basing it on the Retail Price index plus, because the retail price index gives you a higher number than the consumer price index. So when they are going to do other things, they go for the lower one, if it suits them. In other words, if they're spending, if government spending, they tend to go for the one which gives you the lower inflation rate. But when it's the opposite, when they're getting money in, they're going for the higher one as their measure. Now, that's what I mean by saying is political, but one example of what I mean by saying it's political. So it's a very difficult thing. Because not only is inflation rate different for the rich and the poor, its different for people at different ages. My personal inflation right now is someone who's paid off a mortgage recently, is changed by the fact that I no longer worry about housing costs, the inflation rate for my son or daughter, on the other hand, who have mortgages or are paying rent, those are directly affected by anything that's changing in the housing market. And that, of course, like the price of bread is something, you need a place to live. So you can't easily escape at the cost of housing. So whether or not your inflation rate is based on a measure, which includes the cost of housing or not, will directly affect you. Because it will either not be measuring or be measuring the thing which is vitally important to you.

TC: So it's different by ages. It's different by class. I would guess from what you're saying. It's quite different by region of the UK as well, particularly London, the North.

JC: Yes, I think I mean, we only have to talk about housing in London and the Southeast to see that instantly. But also, it can vary. I mean, I believe that you said you were located in West Yorkshire.

TC: That's right. Yes.

JC: South Yorkshire have a policy of subsidizing local transport costs, railways and things. I don't know about West Yorkshire but they subsidize more than East Yorkshire does. East Yorkshire being more sparsely populated, more of a rural area and more conservative in the political sense, well both senses of the term. So mile for mile, it costs twice as much to travel on the trains in East Yorkshire than it does in say round Sheffield.

TC: Okay.

JC: So if I'm traveling by train every day, and I'm in one part of the country, I may be paying twice as much as you are another part of the country. Again, if you're a 60 year old in London or Wales, you get a free bus pass.  If you're a 60 year old in Yorkshire, you don't.

TC: Yes

JC: We get it when you're 65 or 66. You get it when you retire, whatever that age is. So again, that shows this age and region and age and region together.

TC: Even just within Yorkshire, even.

JC: And even just within Yorkshire. Yes, yeah. So these things, so the idea of a simple inflation rate measured by a single number is useful. It's useful in the way that national uniform swing is useful in measuring the election results. You know, in practice, what happens is you can't assume it at the local level.

TC: That's a really interesting comparison. A lot of the newspapers have been talking about inflation today versus inflation in the 70s. We touched on that briefly about the difference with the unions. Would you say there any other major differences or similarities between now and back then?

JC: I think the main difference I'll go back to the unions for a moment and I'm also going to bring Turkey in as another comparison here. I think with the unions, a key thing is now that people the scapegoat is different. That's one important thing. In the mid 1970s, a scapegoat was clearly for many people, the unions, but no one does this now, because they don't really see it as the unions causing the problem. And I suspect, by the way, this is, some of it, is just suspicion rather than social science, you know. The government is getting a lot of flack right now. But that's because the government is being assumed to be the leading agent in these matters, that they assumed to have the responsibility for these matters. They can't shift the responsibility. In the 1970s what happened ultimately, when Mrs. Thatcher came to power, is that the unions were, quote, unquote, tamed, and all the rest of it and so that inflationary pressure as it was seen from the unions declined. As the unions declined in power, in authority and in numbers, and in their workplace location, whereas now we're relatively and unionized by comparison, there's a lot more casual labour as well. Now, there's a lot more Amazon type working, a lot more zero contracts type working. And by the way, this also is another key difference. That is, if you, a lot of people right now have several jobs.

TC: Yeah.

JC: And a lot of people right now on benefits have jobs too lawfully and legally. The problem is that the jobs aren't paying as much as they previously did. So when we measuring,  see we need to think about inflation in relation to employment. So in the 19, in the 1960s, and 1970s, it was regarded that there was a trade off as it were between inflation and unemployment.  We don't think of it in quite the same way now. Because one of the questions we're beginning to ask is, what is the quality of the employment on offer. So you can have full employment as apparently we do, and still have labor shortages as we do. And that's a very curious thing. But one of the interesting things underlying that is precisely that some people have withdrawn from the labour market, and a lot of other people in the labour market, but they're working a lot of different shifts different part time jobs, they’re working with a portfolio of things, this tends to apply more at the, the, the poorer end of the employment opportunities, rather than you're just trying to get another cleaning job as it were to, to make things good. But of course, one of the big pressures right now will therefore be that people will be out there looking for all of these opportunities. Whereas in the past, the main thrust of inflationary concern came through big unions. I talked about perception here, but big unions, collective bargaining for all their members. That was it. The other related point here, of course, is that the National Union of Mineworkers, it was presumed that their members were men.

What happened when the mines closed, while the men were out of work, and suddenly you realize that the workforce composition has changed enormously. So the composition of the workforce now is very different to how it was then as well. It's not only where they are, and what they're doing it is who is doing it, but also what they can do given their other constraints and circumstances. So in a way, things are really very different from the 1970s.

TC: As some people have said, recently, we have every type of inflation right now except wage inflation. Would you say that's fair?

JH: Pretty much, as long as you exclude all the people that the current Prime Minister seems to want to reward. There are plenty. I mean, if you look at the, for example, the differential between those on the highest earnings in the company and those on the lowest earnings, its used to be tenfold or fivefold, and now it's 100 fold, or whatever the figure is, is enormous, enormous differentials here. So some people in the circumstances right now they've got wage inflation, or some people in the short term might have what Keynes called profit inflation. Now, if you're getting higher prices for goods, but it hadn't yet raised the wages of your workers, you can pocket the difference, at least in the short term, profit inflation. But of course, there's only one set of people who can benefit from those sorts of things. And it's not going to be the workers. So, so some people, yes, have wage inflation but precious few, and your average person isn't among them.

TC: I have one more question really about the comparison between now and the past, which is I have been told that there's a very different expectation of standard of living between now and in the past. For example, we have iPhones.

JC: Yeah.

TC: Would you say that's a major factor in our understanding of inflation?

JC: I think it probably is, in certain ways, because let's say, okay, the bog standard answer to start off with is, you know, here I am holding up an iPhone. You can’t see it, it's a podcast, but there it is. Now, I didn't used to have an iPhone 20 years ago, I have one now, should that be counted in the RPi. You know the price of iPhones? Is that something in the shopping basket? Now, someone might say, no, it's not a necessity. So why would you have anywhere near the shopping basket which you use to calculate an inflation rate? But the obvious answer to that is an answer given by Karl Marx, of course, you know, today's luxury becomes tomorrow's necessity. Now, that doesn't apply to absolutely everything. But it certainly applies to means of communication, for example. And it's also, TVs, radios, iPhones, whatever. It certainly applies to a lot of domestic appliances. 50 years ago, not everyone had a toaster. But now we don't think twice about someone having a toaster and then the price of toasters was in the retail price index, you wouldn't be surprised.

TC: Yeah,

JC: it's not a big deal. You would think about it, but 50 years ago, you would go ‘toasters, luxury’, you know, that's not the case now. So I think it's generally speaking, once a population rely on a widespread form of technology, the fact it might have been seen to be luxurious 20 years ago, when only the early adopters had them, it's immaterial. Because now as we all know, the use of a phone is, you do get a few old codgers say, I just want a phone that does phoning, but actually, most of us use a phone for all sorts of things. And that includes the less well off in society as well. And there are a lot of things you can't do without having a phone, or can only do with very great difficulty if you don't have a phone. So it becomes more and more of a necessity. Hence, it moves out of the luxury class, even though by comparison with the past, you might say it's a luxury good.

TC: Yeah.

JC: The answer to the question that is these things now, you can't classify them simply as luxuries. They have to be classified as necessities. But it's probably a spectrum. But they're certainly at that end of the spectrum. They're not at the other end of the spectrum.

TC: It is the problem of comparability over time, right?

JC: Yeah. But I think sometimes people say, Oh, well, you know, when I was a lad, blah, blah, blah, we didn't have this, we didn't have that and we were all okay. Well, yeah, I'm sure you were, I need the proof. That's a wrong way of comparing past and present because, of course, it's a feature of the Industrial Revolution, as much as anything. Put very roughly, I think you could honestly say that, you know, between 1066 and 1700, a lot of things didn't change very much at all, for the average person, over 50 or 100 years, they didn't move out of their parish, they were working on that land, or they might have a small holding or whatever they had. But there was not a lot of change in their circumstances, not a lot of change in their disposable income, there was not a lot of change in the goods they had, they probably didn't possess many goods. Since about 1750 all of that has changed. So the idea that we get used to having more goods at various times over time, is built into our expectation of our own well being. So the idea, and this goes back to the point I made early on about mild inflation as a sign of growth in the economy, a growing economy enables everyone including the worse off to have more, if by the way, if and only if it's structured in such a way to enable that to happen, trickle down effect is not an automatic thing, it has to be made to happen. But that expectation that next year, we'll be a bit better off than we are this year. And then that is measured by things,  now by iPhones but in the past by TVs or radios or milk on the doorstep or whatever it is. That it will what is essentially a good sign and a good measure of people's expectations and their sense of well being about the world. And whether they were looking forward in time to the future, or whether they were uncertain about the future. Because of course uncertainty about the future then changes their behavior in the present. So if you're certain about the future, you're more likely to lay longer term plans, you're likely to buy things and invest in things and all these other things, which in turn contribute to an economy that is healthy and vibrant. But if you are fearful of the future, what do you do? Well, it could be all sorts of things that you do, you might start hoarding your money under the mattress, doesn't really matter what it is you're doing. But very often what you do is deleterious to the economy. So the very fact that people are afraid of economic performance leads to bad economic performance. So you have that sort of self fulfilling prophecy effect going on.

TC: Perhaps as one final question, what positives do you see for the year ahead?

JC: Well, it's an interesting point, because if you take it the most of the inflation in the UK, this is, is caused by cost push factors, so the price of energy and various raw materials and the transport of raw materials and all the rest of it, then some of it depends on what happens in the Ukraine. So it depends on wheat harvests. Now, the problem with that is we don't know what's going to happen in the Ukraine. And plenty of people are saying that inflation now is 13%, and is likely to rise to 18% over the coming year. And that would be getting back to the sort of figures that we haven't seen since the 1970s. If that's going to be sustained. Now, I think it's less likely that it will be sustained at that higher rate in the UK. So I think if I were prognosticating, which you've asked me to do, then I would say look on the assumption that the Ukraine can get back to some sort of normality, and the wheat yields in other parts of the world, are not adversely affected by anything. I'm thinking of America and Canada and so on here, then I can see that the price of certain things might be coming down very quickly. So I can see some alleviation on the price of some raw materials, but not on energy. I think energy is going to be troublesome for quite a long time yet. How that plays out, I don't know. Speaking for myself with my environmentalist hat on, I welcome wind power, solar panel power and all the rest of it. But in the UK, of course, if the government follows its current trajectory, which is by no means a given by the way, if it follows its current trajectory, then it will be reducing the growth in solar power and wind power and so on rather than increasing it. At the time, you might say that we should be increasing it simply because we need all the power we can get and this is a bloody good way of getting it.

TC: And thank you very much, sir. It's been a great pleasure to have you on the podcast. And of course, our listeners, they can find where to find you in the show notes. And of course, they can find you in the International Journal of Social economics.

JC: Thank you, goodbye.

TC: Thank you for listening to today's episode. For more information about our guest and the full transcript of today's episode, please see our show notes on our website. I would like to thank Clare Lehane and Daniel Ridge for their help with today's episode and Alex Jungius of This is Distorted