The UK economy is heading for stagflation. Protecting jobs will be critical

Date: March 22, 2022
Author: David Sables - CEO
Source - The Grocer

On top of an acute inflationary environment, we now have a European war that will take it to a new level. I believe the UK economy is on the brink of stagflation – a combination of persistent high inflation, a stagnant economy and increased unemployment. Keeping jobs will be critical.

The effect of the conflict on global commodities and fuel is obvious. But soaring costs of labour, transport, feed, fertiliser and more have a knock-on effect on agricultural yield, which can wipe out jobs all the way through the industry.

Many of us haven’t experienced stagflation in our working lives. It was last seen in the UK in the mid-1970s after the OPEC oil price shock. Supply was limited and prices went through the roof, driving inflation to 26% – a figure close to predictions from the UN food agency today. The ensuing wave of disruption wiped out business viability with the effect of increased unemployment.

Normally, price increases benefit both retailers and suppliers by generating more cash profit, but consumer demand must not be suppressed so as to negate the effect of the increases. As input costs are rising uncontrollably and consumers simply can’t pay more, the effect on the elasticity of demand is greater. The point at which price increases choke off demand will come sooner and threaten business viability. This path is predictable here and now.

Stagflation combines the worst outcomes of a recession with higher prices for consumers and can create a situation where things quickly spiral into fewer jobs and lower wages. This is very costly and difficult to solve. Central banks have to reduce money supply without hurting families too badly, and keep inflation low. At the same time, they must encourage businesses to hire staff to keep unemployment down. The forces at work here prevent both. Already the number of households in financial difficulty are increasing – many with unsecured loans, lower incomes or unemployment. Inflation prevents them from cutting back, so they will default on rents and mortgages.

As the Bank of England is unable to control inflation by reducing interest rates, which are already rock bottom, you’d expect it to go down the route of a quantitative easing (QE) programme to protect spending and jobs. However the pandemic crisis saw the Bank double the existing QE to £895bn, with no obvious exit visible and pressure from the House of Lords to stop this “addiction to printing money”. Damage to the economy seems inevitable.

Solutions go beyond Russian vodka boycotts. We need to recognise this is a watershed moment – it is not business as usual. Be clear on the changed demand elasticity of products, cut costs of production and protect jobs, even if it means wage cuts.

Economic discussion during a time of human tragedy may seem uncomfortable, but we all have a responsibility to ensure our companies survive. One option is to bet your savings on the growth of Aldi and Lidl shares.