Inflation woes

Ignacia Pinto says the cost of living crisis, turbo-charged by the government, is hitting women hardest

On August 3^rd, the Bank of England played its favourite tune for the fourteenth time: another interest rate hike reaching a whopping 5.25%, the highest level since the 2008 financial crisis. The objective of these successive increases has been to tame inflation, which peaked at 10.1% in 2022. However, we are still experiencing high levels of inflation – the consumer price index (CPI) rose by 7.9% between June 2022 and June 2023. Food prices have increased even more. A basic weekly basket for a woman increased from £41 in July 2022 to £48.57 in July 2023 – equivalent to nearly £400 more per year. A look towards our European neighbours, such as France, Germany, Spain and Italy, as well as across the pond in the US, reveals that other countries have been more successful in bringing down inflation.

The Bank of England is supposedly an autonomous and neutral entity with a mandate to maintain inflation around 2% and promote financial stability. The main tool to control inflation is the interest rate. The logic seems simple: As borrowing becomes more expensive, consumption, investment, and overall spending go down, easing pressure on prices. All fine in theory when these pressures are internal, but what if inflation is driven by different factors?

The pandemic and the following return to activity created imbalances in global distribution chains, pushing prices upward. Then, Russia’s invasion of Ukraine caused a peak in energy and other commodity prices, ultimately impacting household budgets. On top of that, Brexit increased trade costs, leading to higher food prices. Lately, evidence indicates that price increases have been driven by skyrocketing corporate profits in several countries, including the UK.

High prices lead to a loss in people’s purchasing power and, to compensate, wages should increase in line with inflation, so people don’t see a decline in their real income. However, that hasn’t happened – at least for most people. The Bank of England is calling for wage restraints to control inflation, leaving the most vulnerable households bearing the brunt of economic adjustment. At the same time, data from the Bank itself suggests that workers on low salaries haven’t received wage increases, while people on high incomes have seen their salaries adjusted to cover the rise in prices. This means that low-income households, including lone mothers, disabled people, and households from minority ethnic backgrounds, suffer a disproportionate blow from the soaring prices of essentials, on which they spend a higher proportion of their budget.

So, how “neutral” is it to put the most vulnerable at the forefront of paying the cost of financial and monetary stability while ignoring the inflated profits of huge corporations? Monetary policy has consequences for income and wealth distribution, so we should be asking who benefits from this and who loses out. With consecutive increases in the interest rate, those who are net debtors will see their situation worsen. This includes people with mortgages and households taking up debt to pay for essentials, resulting in a double cost-of-living and debt crisis. 

In this context, it’s worth questioning whether interest rate hikes are the best way to control inflation. Scrutinising the available tools to manage inflation and their effectiveness is fundamental, especially in a climate emergency that will add a permanent dose of uncertainty to our economy.

Coordination between monetary and fiscal policy could be the way forward. For example, the Government could top-up departmental budgets to allow for an increase in public sector pay, at least in line with inflation. As women comprise the majority of the public sector workforce, this would directly ease the disproportionate pressures of the cost-of-living crisis on them. Recent analysis from the IPPR has highlighted that such an increase in public sector pay wouldn’t fuel inflation, disproving the “wage-price spiral” argument. This would protect the livelihoods of thousands of public sector workers in vital sectors such as health, care and education.

Taxes should increase for energy giants, banks and corporations raking in massive windfall profits on the backs of working people. The additional revenue could be used to shield households from external pressures on energy prices and periodically increase benefits in line with inflation, so they don’t lose their real value. Women would benefit from this as they rely more on social security due to their lower incomes – a consequence of the unequal distribution of unpaid work and caring responsibilities.

The outcomes of the UK’s monetary policy are anything but neutral. The sole reliance on the Bank of England to curb inflation deepens existing inequalities and will continue to do so. The Government needs to take responsibility and learn from countries that have been more successful than us and incorporate new policy tools that can tackle the challenges we are facing now. Moving towards a green and caring economy requires collective efforts in every policy aspect.