The late great fantasy novelist Terry Pratchett, reasoned, through one of his characters Captain Samuel Vimes, that the reason that the rich were so rich, was because they managed to spend less money.
Vimes cited his boots. A great pair of boots cost fifty dollars and kept your feet dry and comfortable for a good ten years. Vines couldn’t afford fifty dollar boots, so went for the ten dollar boots which leaked and lasted a year. So over the span of a decade, the rich man would have dry comfortable feet for fifty dollars, while the poor man would have spent twice that, and had wet feet. The Captain Samuel Vimes ‘Boots’ theory of socioeconomic unfairness.” is worth remembering as we head into the turbulent economic waters of 2022 and beyond.
Inflation is back, it’s been a while, and you need to be getting on a bit to remember it much over its ideal target of 2%. For much of the time since the financial disaster of 2008 the worry has been deflation, it didn’t really come to pass, but now in many countries the rate is 5%+ and predicted to rise well above 7% this year and stay there for a few years more at least.
Why? Well there are a few factors at play here. Energy costs, primarily gas prices, are soaring due to supply problems, meeting a rise in demand, and a bit of geopolitics thrown into the mix. Taxes are rising too, to begin to cover the eye watering costs of the pandemic. The loss in production and tax revenues from shutting down the economy, and the giant bill for furlough payments has left an unprecedented dent in the balance sheet of most countries. There is also a shortage of labour and raw materials in many sectors, again due to slow rebound from shutdowns forcing prices ever upwards.
Inflation is measured by a basket of goods, some real, like bread, fruit, Playstations etc, some you can’t put in a basket, like mortgages, cost of insurance etc. While this representative sample of typical expenditure is periodically tweaked to ensure it stays as relevant as possible. It’s still a pretty crude measure that isn’t very good at telling you what you really need to know. Which is, how is this affecting the spending power of actual people?
To understand that you need to appreciate how people buy things. If you are better off, you may be likely to buy in advance, buy in bulk. You may put everything on your credit card and then clear the entire balance at the end of the month for 0% interest. You have effectively earned a month’s worth of interest on your expenditure before spending it, giving a small discount. The least well off however are much more likely to live on credit. Buy now pay later, short term loans to cover the end of the month after the money has run out, many of which have staggeringly high interest rates. Ie They pay more, for exactly the same things that the better off can buy for a little less.
The measure of inflation is also subject to problems. Over the last two years or so, the prices of staple foods at the cheaper end have suffered double digit price rises. Pasta, rice, tinned goods etc, while higher end products have had little, or no increase over many years. Rapidly rising property costs hit renters harder than mortgage payers, and the less well off are likely to spend a much higher proportion of their income on energy.
The problem is exacerbated by the economic winds that have prevailed since the 2008 credit crunch. Wage rises came to a screeching halt, and have shown little progress since. Predictions are that by 2024 wages since 2008 will have risen by only 2.5%, the 16 years before that saw a rise of 38%. Interest rates since 2008 have been at historic lows, close to zero, which has encouraged record levels of personal debt to pile up, leaving millions at the mercy of even modest hikes in interest rates.
Inflation of this level is always a problem for the entire economy, but the large number of people who are sailing very close to the wind are vulnerable to even slight fluctuations in their economic fortunes that may yet stall the post covid recovery, and remember, before you judge a person, walk a mile in their boots.
By Phil McCoffers – The Islander Economics Correspondent
