The politics of high inflation – can governments do anything?

Britons woke up to the news today that inflation in the UK has hit a 40 year high of 9%. Recent increases to power bills, fuel and groceries have in no small part driven this inflationary pressure and indications are that prices could increase further. The bank of England governor has called for wage restraint fearing that this could drive inflation even higher, though with the cost of living rising so quickly this call will likely fall on deaf ears. The recent losses in local body elections and lacklustre polling for Boris Johnson’s Conservatives is in part due to the rising cost of living. But is this all just a case of bad economic management by the Conservatives?

My usual reference point is comparing and contrasting the UK and New Zealand situations, having lived in both countries. New Zealand’s inflation rate is at a 30-year high hitting 6.9%. A friend in NZ recently asked if I could send petrol over from the UK as the cost had gone up too much over there, the joke soon fell flat when I told them how much a tank of petrol cost here in the UK. In New Zealand, the opposition has been quick to blame the Labour Government in New Zealand for this, at a time when support for the government is falling fast. Having won a record majority in 2020 for their handling of the pandemic, Jacinda’s government now faces a backlash over coronavirus restrictions and is taking the blame for current economic challenges. Commentary in the New Zealand media also tends to focus on inflation as a domestic issue, as such much of the commentary is often wide of the mark.

The above Bloomberg graph shows the global inflation rates spiking upwards in 2022

In Australia, the country goes to the polls for their first federal election since the pandemic. Whilst polling numbers are still fairly close there is a real possibility the right of centre Liberal Coalition Government led by Scott Morrison may lose, in no small part due to inflation and the rising cost of living. Whilst there are plenty of good reasons to vote out the Coalition government, not the least their inaction on climate change, like in Britain and New Zealand, is the cost of living increase in Australia really down to the federal government?

In the US, President Biden and the Democrat controlled House and Senate are facing an uphill battle in the November midterms against a Republican Party now very much aligned to Trumpian politics. For the Biden administration there appear to be few options to control inflation in the short term. I have previously blogged about the limitations of the US political system and it is no surprise that many Americans yet again feel frustrated. However, it is clear that this is not a crisis limited to any single nation-state, what we are dealing with is a global inflation problem.

At the start of the pandemic, I wrote a blog post outlining how there would be long lasting economic ramifications of this crisis. This, along with the Russian invasion of Ukraine is driving inflation and causing economic uncertainty. This is particularly challenging for much of Europe where there is a high level of reliance on Russian Oil and Gas and moves to end this reliance will see short term price hikes and energy shortages.

Previously, I have written about the importance of global governance and how our current global governance institutions are not up to the challenges we face in the 21st century. The current crisis illustrates this more than ever. At the current time, we turn to the nation-state and in democratic countries we as voters can hold our leaders to account for what happens, including economic management. In reality, how much can Jacinda Ardern, Boris Johnson, Scott Morrison, Ursula von der Leyen or Joe Biden or any other world leader do? When finance Ministers do the national budget each year, many of the key economic factors are determined by external factors, not by their government’s decisions. Likewise, we can beat up the Bank of England, the Reserve Bank in New Zealand or other central banks for not controlling inflation within the targets they have been set, but they did not cause a global pandemic, invade Ukraine or control many of the key drivers of international inflation at that time.

This is not to let governments off the hook, as they still have the power to mitigate the effect of high inflation. Governments have the power to reduce or remove sales taxes, regulate pricing or support people on low incomes through benefits or policies that help lift wages. On the global stage, finance ministers when they attend the yearly Davos meeting, or leaders who attend the G20 meetings, need to be doing more to develop a global economic strategy that can protect against these sorts of shocks. Further, they need to create global governance institutions that can ensure a stable global economy that delivers for everyone, not just now but into the future. This is what we should be demanding of our governments.

Back in the late 1990s and early 2000s the big push was for globalisation, which in reality was a push for removing tariffs and international market liberalisation. The anti-globalisation movement of the time often took the position that this agenda weakened the nation-state and undermined democracy. The problem, which neither side really understood, is that in a world where we for a long time have depended on international trade but also on the movement of people, relying on national governments to resolve this will inevitably fail. Margaret Thatcher, in the introduction to her memoir The Downing Street Years, claimed the following:

An internationalism which seeks to supersede the nation-state, however, will founder quickly upon the reality that very few people are prepared to make genuine sacrifices for it

Margaret Thatcher, The Downing Street years, page 11

Yes, in terms of consciousness people still hold nationalism and their own country in high regard. But where we increasingly see countries with governments of all different colours struggling to control the cost of living, at some point we must face the fact that an international response is required. People may not believe in current global governance institutions or be “prepared to make genuine sacrifices” for them. But they may do if these institutions were in fact giving people a better quality of life by controlling inflation and the cost of living. At the time of writing, this all seems somewhat academic, with there being little likelihood of an international response, other than some short term cooperation to control the immediate crisis without looking at the underlying long term problems. Yet it is clear that we will continue to face these economic challenges with tools that are ill-equipped to face the problems. Only a truly international response can create an economy that delivers for all.

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