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Inflation hit seven per cent in the US this week. Many economists believe that it will reach or exceed that in the UK within months. Even the Bank of England, which was still forecasting a rate of 2 per cent for the next several years last May, expects inflation to hit 6 per cent by the spring.
Anybody under the age of 40 will struggle to remember a time when inflation was a serious problem. This has bred a certain amount of complacency and money-printing has become de rigueur in some circles thanks to the voodoo economics Modern Monetary Theory. The IEA, however, has been warning about an inflationary boom since June 2020 when we published Inflation: the next threat? by Dr Juan Castañeda and Professor Tim Congdon.
It was also one of the issues I discussed with IEA colleagues Julian Jessop and Emily Carver on our YouTube channel this week as we looked at the year ahead.
During the pandemic – and especially during lockdowns – governments created vast amounts of money while their economies produced less wealth. This, combined with Covid-related supply-side shocks, has pushed up prices. The only question is whether the inflation will be transitory or chronic. If workers demand higher wages to compensate for higher prices, it could trigger a wage-price spiral. If they don’t, they will become poorer in real terms and will be able to buy less. Neither outcome is good.
It would help if the government had a plan for growth, but it remains fixated on trivial lifestyle regulation and petty prohibitions. The latest initiative from Defra is a ban on sachets of tomato sauce and vinegar. "They're an obvious contender for a ban," said Environment Secretary George Eustice, as if it were a competition. "There's no reason most restaurants can't use big bottles instead of sachets." It would be most surprising if thousands of businesses used sachets for no reason at all. Hopefully, the government will launch a consultation to find out what the reasons are and what the costs of a ban will be.
As I told the Daily Mail, banning things seems to be a displacement activity for politicians who don’t have the answer to the pressing economic problems we face. It never seems to occur to them that placing endless regulation on businesses is a large part of the reason the economy is so sclerotic in the first place.
Christopher Snowdon
Head of Lifestyle Economics, Institute of Economic Affairs
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A PERFECT STORM
2022 looks set to be an expensive year – as higher energy prices, rising inflation and tax hikes combine to push up the cost of living.
Writing for The Telegraph, IEA Energy, Environment and Infrastructure Analyst Andy Mayer argued that successive governments have prioritised Net Zero targets over energy security and affordability, which has left us particularly vulnerable to rising regional gas prices.
He added that short-term price relief is required now to address the rising cost of living, but that the long-term strategy must include a radical reshaping of energy markets.
In order to support bill payers, Labour and the Liberal Democrats have proposed a windfall tax on energy firms. Commenting on the proposal for The Telegraph, Andy highlighted the impact of surprise raids on investment and confidence.
Instead of imposing a windfall tax on North Sea oil and gas, Andy argued that "the whole system needs a fundamental review with a reversion to a simpler system with fewer opt-outs, consistent taxation across the different types of energy provision, and a carbon tax to reflect the challenge of climate change."
Andy also appeared on BBC Radio 5 Live on Wednesday, which you can listen to here.
IEA Director of Communications Annabel Denham also questioned the economics of windfall taxes for The Spectator.
Annabel warned: "They [windfall taxes] hurt consumers by stifling competition: while incumbents must put up with the tax regime, new entrants can divert their efforts elsewhere. And they risk a decline in investment, given few investors will put funds towards an industry that is subject to an unstable tax policy."
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COMMITTEE CORRIDOR
IEA Economics Fellow Julian Jessop appeared before the Treasury Committee to give evidence to the 'Equal Recovery' Inquiry on Wednesday.
Julian discussed the cost of living crisis, including the impact of rising energy costs and tax increases on low income households. You can watch the full proceedings here.
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iN THE MEDIA
Fat lot of good... In his latest Times column, IEA Director General Mark Littlewood discussed the sugar tax, its shortcomings, and how the revenue raised from it has not been earmarked for spending on anti-obesity measures as was promised.
Mark argued that hypothecated taxes are often swallowed up in general tax and spending commitments. He also appeared on Times Radio to discuss the article, which you can listen to here.
On the up... The Bank of England raised interest rates in December in response to inflation pressures. KPMG has estimated the cost of servicing our national debt will hit almost £1,000 per person this year.
Quoted in the Daily Mail, Mark Littlewood called the situation "dire," adding that "as with most problems, the debt problem gets worse the longer you delay facing up to it." You can read his comments here.
The party of business...? With the tax burden at a 71-year-high, IEA Director of Communications Annabel Denham questioned whether the Conservative Party is committed to reducing burdens on businesses and individuals.
Writing for The Telegraph, Annabel noted that while ministers pay lip service to reducing state interference in the economy, their actions suggest they may have "fallen out of love with free-market economics".
Hey, teachers, leave those kids alone... While the Prime Minister resisted calls to bring in tougher Covid restrictions over Christmas and New Year, the new school term saw the reintroduction of mask mandates in English secondary schools.
In her fortnightly column for Conservative Home, IEA Head of Media Emily Carver argued that the government has failed to provide adequate evidence for the move and should avoid engaging in 'Covid theatre'.
Off the rails... With fare income plummeting since Covid and "bucket loads" of taxpayers' money being thrown at the system, IEA Editorial and Research Fellow Professor Len Shackleton wrote for CapX on the state of the railways.
He argued that with rail travel unlikely to recover to pre-pandemic levels, there is an increasingly strong case for radical reform.
One year on... It has now been over a year since the UK signed a comprehensive trade deal with the EU. Writing for The Spectator, Annabel Denham assessed how well Brexit is going so far.
She argued that Britain has failed to take advantage of our independence, lamenting that "the Johnson Government seems to believe our newfound freedom can be used to pass more pettifogging laws."
IEA Head of Regulatory Affairs Victoria Hewson also gave her assessment on the first year of Brexit on our YouTube channel, in conversation with Emily Carver. You can watch here.
Culture control left... This week the four people accused of criminal damage in connection with the toppling of the statue of Edward Colston were found 'not guilty' after a trial in Bristol.
IEA Head of Cultural Affairs Marc Glendening wrote for CapX on the verdict, which he argued demonstrates "the selective enforcement of policing and application of the law". He warned that identity politics has now permeated the law itself, with some victims of crime more equal than others.
Marc also appeared on talkRadio to discuss the trial of the 'Colston 4'. You can watch a clip here.
Ghost flights... With the news that Lufthansa Group expects to operate 18,000 flights with no passengers between December and March this year, our new Head of Public Policy Matthew Lesh wrote for The Spectator on how EU red tape is at fault.
Matt noted that under EU rules, airlines must use 80 per cent of their allocated slots or they risk losing their spaces to other flights. This ‘use it or lose it’ rule not only results in ghost flights but also seriously distorts the market in favour of well-established incumbents and leads to inefficiencies in the market.
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THE MEANING OF COMPETITION
Before the Christmas break, the IEA released a new briefing paper, highlighting the potential unintended consequences of proposed regulatory interventions in digital markets.
The paper is a collection of lectures made at a conference held in November 2021 on the Meaning of Competition, hosted by the IEA in partnership with the Information Technology and Innovation Foundation.
Contributors include Dr Michael Grenfell, Executive Director on the Board of the Competition and Markets Authority, and Chris Philp MP, Parliamentary Under Secretary of State at the Department for Digital, Culture, Media and Sport. You can read the paper, edited by IEA Head of Regulatory Affairs Victoria Hewson, here.
You can also find recordings of the lectures on the IEA YouTube Channel here.
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IEA PATREON
Thank you to all of you who have already signed up to become an IEA Online Patron. Becoming a Patron grants you VIP access to our latest videos, priority invites to our virtual events, and the opportunity to engage directly with IEA Director General Mark Littlewood and the IEA team. For just a small donation you can get all these benefits and more.
To visit the page and find out more about the IEA’s Patreon, follow the link here or watch our trailer here.
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IEA DIGITAL
When XR came for tea... In October 2021, Mark Littlewood and IEA Head of Political Economy Kristian Niemietz met with Extinction Rebellion members to discuss how best to tackle climate change. You can watch the event here.
Markets & Morality... In the latest episode of Markets & Morality, host Adam Bartha welcomed Christopher Snowdon and IATP’s Director Alexander Hammond onto the show to discuss what we can look forward to in 2022 and whether classical liberal ideas will prevail across the world in the rest of the decade.
On life support... IEA Senior Advisor to the Director General Sam Collins analysed the performance of the NHS with Kristian Niemietz. The pair discussed why the NHS is impervious to debate and reform and what can be done to improve healthcare in the UK. Watch here.
Molly-Mae Thatcher... Emily Carver was joined by Kristian to discuss the recent controversy around comments made by Love Island star turned Creative Director of PrettyLittleThing, Molly-Mae Hague. You can watch here. Kristian also wrote about the controversy for CapX.
IEA Podcast... IEA Communications and Public Affairs Officer Kieran Neild-Ali spoke to Dr Edwin Van De Haar about liberal International Relations (IR) theory, how it relates to classical liberalism, and which IR theory best describes and offers a solution to the Russia-Ukraine crisis. Listen here.
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CALLING ALL STUDENTS!
We have a several opportunities coming up for students, including exam revision courses, internship programmes, and summer schools.
A-Level / IB Economics Exam Revision Course... For the first time, we will be running an exam revision course from Tuesday 12th – Thursday 14th April.
Our week-long Internship Programme will also run as normal from Monday 4th – Friday 8th April. Applications for both programmes close on February 4th 2022.
Residential Summer School... In partnership with the Institute of International Monetary Research, the Vinson Centre, and the Initiative for African Free Trade and Prosperity, the IEA will host a residential summer school.
This programme is open to undergraduate students and will take place from 27th June to 8th July. It will have four streams: general economics, monetary theory, economic history, and trade and globalisation.
Sixth Form Future Thought Leaders’ Programme... You can also apply to attend a week-long programme for sixth formers which will take place from Monday 25th – Friday 29th July. The week will include lectures, discussions, and debates with expert economists.
Summer School Internship... Last but not least, our summer school internship will start from Tuesday 2nd August – Friday 19th August. Interns will participate in lectures, seminars, debates, discussions, as well as workshops on professional and career development.
You can find out more about all of our internship programmes here, or email IEA Education, Outreach and Programmes Manager Brittany Davis at [email protected] with any questions.
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TIME FOR A (STUDENT) CHALLENGE
A reminder that submissions are open for the IEA's Monetary Policy Essay Competition, which is run in partnership with the Vinson Centre and the Institute of International Monetary Research. This year’s question is: 'Does inflation matter? And will the current inflation upturn be transitory or not?' The deadline is Friday, January 21st 2022.
Entries are also still open for this year's Budget Challenge. Schools can enter teams of up to four students to put together a submission that will outline a budget with taxation and spending policy for the United Kingdom in the coming financial year. The deadline to submit is Friday, January 28th 2022.
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