New Bank of England report should set alarm bells ringing

The inflation report from 11th May and newly released data provide further evidence that the UK economy is increasingly unbalanced. The Bank of England has warned that wages are stagnating, while everyday prices are rising, leading to a higher cost of living.

The squeeze on living standards should worry politicians from all parties vying to form the next government. Whoever wins power on 8th June will face a major headache unless they act to raise real wages. But doing so means confronting our unbalanced economy.   

The Bank is forecasting that inflation will continue to rise this year, climbing from 2.3 per cent p.a. in March to 2.8 per cent p.a. in the fourth quarter. This means that the Bank expects consumer prices to not only keep increasing, but also to be increasing at a faster rate.   

The declining value of UK sterling has led to higher import prices, which have essentially passed through to the everyday items that households buy.

Most importantly, at the same time the Bank expects price increases to outpace wage growth, which will only be 2% p.a. With prices rising faster than wages, the standard of living in the UK will fall as the relative cost of living increases.

The Governor of the Bank of England, Mark Carney, said:

“With wage growth moderating and inflation picking up, both household spending and GDP growth have slowed markedly.”

From our perspective, the Bank of England is relatively over-optimistic in its analysis of the UK’s short-term growth prospects. In the absence of higher consumer borrowing, prices rising faster than wages must reduce economic activity. Meanwhile, businesses may reduce investment levels due to growing input costs and falling unit sales.  

Indeed, data released today by Samuel Tombs of Pantheon economics suggests that our manufacturing sector is beginning to feel the pressure of higher costs of living:

“The 0.6% month-to-month decline in manufacturing output was driven partly by a 3.9% plunge in consumer durables production. Manufacturing output also was dragged down by a 1% drop in capital goods production, perhaps indicating that Brexit risk is continuing to subdue business investment.”

Data released today shows a disappointing performance in the productive sectors of the UK economy. Construction, manufacturing, and industrial output have all fallen for the third consecutive month. The trade deficit is at £13.4bn, the 3rd widest on record in nominal terms.

Meanwhile, consumer borrowing is at its highest on record and continues to grow at around 10%, while the household savings rate is at its all-time low. Indeed, there is a real danger that as costs of living continue to increase, households will be forced to dig into their depleted savings or to borrow even more.

At the same time the Bank of England is continuing to pump newly created money into our oversized financial sector, while the majority of bank lending has been for property rather than lending for non-financial businesses.

Our economy seems to be increasingly unbalanced. Wealth is increasingly being concentrated in the hands of wealthy asset-owners, while sectors such as manufacturing and small businesses are starved of the money they need to create jobs and raise incomes. At the core of this is our broken money and banking system.

The vast majority of money in the UK is created by banks when they make loans. This power to create money, in the hands of commercial banks, has been highlighted as one of the root causes of both the Great Depression of the 1930s and the financial crisis of 2007-2009. The former chairman of the UK’s Financial Services Authority, Adair Turner, has argued that: “The financial crisis of 2007/08 occurred because we failed to constrain the private financial system’s creation of private credit and money”. Our analysis also suggests that this ability to create money contributes to a wide range of social, economic and environmental problems. (More info)

This election, we’re asking MP candidates what they’ll do to tip the balance towards a fairer and more sustainable economy. You can get involved by attending a hustings or printing off our doorhanger in case your candidates drop by.