John Maynard Keynes articulated that during the first world war, the great inflationary episode led to the enrichment of profiteers while burdening the nation with a disproportionately large national debt. Today, Britain finds itself on a similar trajectory as Keynes’s profound analysis reverberates within the corridors of power.
When Jeremy Hunt meets with industry regulators, mere soundbites won’t suffice to curb companies’ exploitation of their customers. Recently, mobile and broadband companies implemented the most significant price hikes in three decades. Moreover, data from the Organisation for Economic Co-operation and Development revealed that, for the first time since the pandemic, businesses in the UK were primarily responsible for fueling inflation.
There exist two distinct concepts of inflation that are often conflated. The first scenario entails a simultaneous increase in all prices, including nominal wage rates, while the real wage rate remains unaffected. The second scenario involves prices increasing at a faster pace than nominal wages, resulting in a decline in real wages. Keynes referred to the former as “income inflation” and the latter as “profit inflation,” which many advanced economies face today. Gita Gopinath, the deputy director of the International Monetary Fund, cautioned recently that if inflation is to recede rapidly, companies must allow their inflated profit margins to decrease.
Keynes would be dismayed by the lack of interest western governments show in redistribution and their unwavering commitment to winner-takes-all capitalism. The latest research from the IMF demonstrates that corporations in wealthy nations have been shielded from the negative impact of trade shocks to a greater extent than wage earners. One explanation offered by the IMF is that “prices are more adjustable than wages, as firms can quickly adjust prices to protect their profitability.”
The current inflationary phase in Britain is not solely driven by profiteering but also by corporate power. Regrettably, the government’s response to the resulting social challenges is inadequate. If profits are excessive, they should be taxed, and state spending should be increased relative to national income to put more money in the hands of workers. Economist Bill Mitchell suggests that Japan’s successful reduction of inflation resulted from adopting a looser fiscal policy, involving fiscal transfers to households and business subsidies to compress profit margins. Alternatively, the French government has taken a stern stance by threatening financial penalties against food producers who fail to lower prices.
While UK ministers may argue that the inflationary impact of the Ukraine war was beyond their control, they inadvertently exacerbate the price shock by reducing government energy support, supporting income redistribution from the poor to the wealthy through rate hikes, and failing to tackle the predatory conduct of large corporations. The mystery lies not in why the public is apprehensive but rather why ministers fail to recognize the problem at hand.
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