£3. The sacred Tesco meal deal. The bargain every Oxford student knows about. The day I walked into Tesco to see £3.50 plastered on the label was the day I knew something was up. Yes, I do have a Clubcard and so my pain was soon alleviated, but the thought of the price of a meal deal going up had me sweating.
Whilst I acknowledge my moment of distress was perhaps overblown, I hope I am forgiven for its (tenuous) relevancy in pointing towards the second global economic crisis in as many years. Food price rises are just one element of the on-going ‘Cost-of-Living Crisis’. A rapid rise in inflation has been coupled with a plateau in economic performance that has recently become recessionary, an unfortunate double-act titled ‘stagflation’. A phenomenon most hoped was confined to the past, the very utterance of the word strikes fear into any economist. You may well be thinking, why?
A reasonable place to start would be 1973, the end of the ‘Golden Age of Capitalism’. Reacting to Western support of Israel in the Yom Kippur War of 1973, Arab members of OPEC quadrupled the price of oil and embargoed exports to the US and UK, amongst other nations. This led to rapid inflation, peaking at 24% in 1975, with prices remaining high throughout the decade. To bring this inflation down, interest rates were hiked to slow the economy down. This meant mortgages became expensive, fast. Hopefully, this is starting to sound familiar to recent events: fossil fuel prices up, inflation up, interest rates up, economy down.
Fast-forward to 2022 and geopolitical factors lie at the centre of the energy price crisis once again, most significantly the Russia-Ukraine conflict. Putin’s nationalistic invasion led many western countries to announce plans to become independent of Russian fossil fuels – the US has already banned such imports. This political decision has led to an increase in the price of oil internationally, essentially acting as a restriction to supply. Contained not only to the price of filling the petrol tank, soaring energy prices have driven food price inflation through raising the cost of shipping and fertilisers. Furthermore, the conflict has happened to take place in the ‘breadbasket’ of Europe, which prevented over 20 million tonnes of grain from leaving the country until the recent grain export deal. This squeeze on fuel and food supply has been the main driving force behind UK inflation hitting 10% in July. In 1982, when inflation was last this high, a pint would have set you back just 73p – one can but dream. Unfortunately, the worst is yet to come, as the situation is expected to deteriorate significantly. Recent estimates have placed inflation as high as 20% for early next year.
Back to our original question: why is stagflation (inflation coupled with recession) so feared? In light of the discussion above, it is clear that fears surrounding inflation itself are at the centre. Whilst a little bit of inflation is desirable, indeed the Bank of England targets 2% a year, alarm bells go off as soon as this figure creeps up. Fundamentally, this is because of fears that inflation will spiral upwards as people begin to expect higher prices. In turn, inflation can become a self-fulfilling prophecy. In the extreme scenario, this can turn to hyperinflation. German hyperinflation of 1923 led people to use paper money to cook with, and Zimbabwean inflation of the late 2000s managed to reach 89.7 sextillion – yes sextillion – percent annually by November 2008. To prevent such a collapse of the national economy, central banks can respond through raising interest rates. However, this action will slow the economy down. In turn, it is possible to reach a point where the economy is actually shrinking at a time of high inflation, both undesirable results. This is the basic intuition behind the severity of the current economic situation in a more abstract sense; the tangible stress the crisis is placing on people across the country is all too familiar.
Most will be acutely aware of the energy price cap rise of 80% on 26th August. A typical annual energy bill will rise to £3549 by October, £1600 more than last year. For many, the only way to cope with this frightening figure is to restrict energy use this winter. Indeed, nearly a quarter of respondents to a poll (conducted even before the latest price rise) stated that they planned not to use their heating at all over the coming months. The food crisis is no less daunting, with the price of milk and pasta rising by 34% and 24% respectively. Crucial to the situation is that real wages are failing to keep up, falling 3% over the past year. Placing those figures one after another makes it hard to imagine how households could possibly manage over the coming months. The bleak winter looming over us is a serious national crisis that should not be neglected due to the scale of aid already provided in recent years.
Indeed, students at Oxford are no exception to feeling the consequences of the on-going crisis. Across many colleges there has been uproar at the rise in accommodation costs for the forthcoming year. Corpus Christi College is merely an example of this increase, with accommodation costs increasing by 7.5%. It must be noted that this figure had been negotiated down from the 13% proposed earlier this year using the Van Noorden Index. This index purportedly calculates the increases in costs for colleges year-on-year – increases which led St Catherine’s College to propose a similar figure of 11.8% earlier this year. To juxtapose these figures, I, like many others, have recently received a letter that my student loan has risen just 2.3%. For many students the disparity between the rise in their loan, and the higher fees they will have to pay, will result in a serious financial burden over the coming year.
Whilst a free Clubcard will help students circumvent the 50p hike on their beloved meal deal, it sadly won’t insulate them from the vast increases in the price of food. The staggering price rises in essential items will significantly increase the cost of living over the coming year. Without further financial support, students could really struggle. This financial stress will merely exacerbate the anxiety of a cohort that has already suffered the effects of lockdown upon their education and mental health. Growing up in 2022 gives students many things to be grateful for, but those in positions of power must not overlook the serious effects of recent crises on young people.
What is there to be done?
The general population faces decisions this winter that no UK household should face in 2022, such as going without heating, meals and electricity. Unfortunately, it is at this point unsurprising that those in power are once again proving incompetent. In a time of real national emergency, the puppet role played by Johnson has been nothing short of ridiculous. Sadly, his successor seems so far unlikely to be any more competent. Liz Truss’ unidimensional focus on cutting taxes appears doctrinaire in a time where sensible pragmatism must prevail. Truss’ Neo-Thatcherite emphasis on the need to boost growth through tax-cuts is all too reminiscent of the failure of ‘trickle-down ‘economics of the 1980s. Moreover, a tax-cut would eventually be likely to stoke the already wild inflationary fire. On the other side of the spectrum lies Labour’s plan to completely freeze energy bills over the coming months. This will be in part funded by a windfall tax and supposedly cost-free to households over the coming months.
Both Truss and Starmer seem to be caught in the all-to-familiar political discourse of ‘Cakeism’, a tendency Paul Johnson, director of the IFS, has recently polemicised. Ultimately, the cake has got smaller as a result of the current economic crisis. Someone needs to tell Truss that regressive tax-cuts will not help those most in need this winter. Yes, it will mean a fraction more money in the short run, but it will also mean require a fall in government spending unless the deficit is to skyrocket. This is without even starting on the fiscal resources needed for the resuscitation of the NHS. The economic cake won’t magically grow and end up in the pockets of families, households or students in dire financial situations over the coming months. As of 6th September, a freeze on energy bills seems now to be on the cards for the new Prime Minister, however Truss’ reluctance to raise taxes indicate that the UK’s debt could balloon further. Meanwhile, Labour can be rightly criticised for somewhat idealistic, ambitious fiscal policy suggestions that can seem too good to be true. The chances that their plan will remain at £29 billion and fully funded without tax rises for households is seemingly minute. Whilst it is easy to criticise both parties for the seemingly profligate treatment of government funds, it must be remembered that this is a time of national emergency. The government expenditure brought about by the pandemic cannot cloud the government from taking the steps needed to protect the population. As stated by Ed Miliband: “we [Labour] will do what is necessary to protect people.” At least Labour have a plan; let us hope that Truss too will surprise us with a package to support families over the coming months.
What can we learn from the crisis?
Stepping back, it seems that there is a tendency for policy to take on an idealistic, ‘Cakeism’ flavour that rejects the compromise and considered pragmatism necessary. Brian Cox’s recent interview with James O’Brien is perhaps an unlikely place to reference here, yet his ruminations on politics resonated with me. Cox raises the issue of excessive hubris within politics and eloquently discusses the need for greater humility. One solution he provides is the greater interlocking of science and humanities, ‘PPES’ instead of PPE. The objectivity and humbling capacity of scientific knowledge forces one to accept the limits of their understanding, rather than encouraging the deceit and blabbering of politicians so familiar now to the electorate. Regarding compromise and pragmatism, he goes on to liken the need to work with differing needs and perceptions to that of an electron. An electron is now commonly conceived as acting both as a wave and a particle, neither conception fully suffices all the time. Whilst a somewhat bizarre analogy to make, this malleability of conceptualisation is something that a functioning democracy needs. Rigid, doctrinaire, economic policy seems at odds with the nature of a national emergency. Yes, this may require an acceptance of a middle ground which may not tick the idealistic, ‘Cakeist’ boxes that sound so sweet. Nonetheless, to tackle problems such as the current economic crisis, an acceptance of trade-offs and compromise is necessary. To avoid a potential balance-of-payments crisis, tax cuts should not be made if sufficient aid is to be provided this winter. This is the reality that politicians don’t like to admit, and is the reality that Truss has faced serious scrutiny for, even from like-minded Tories.
Economic decisions of the coming weeks must focus on the mechanisms that will help to save lives this coming winter. However, the energy and food crises also bring longer-term, more perennial dilemmas to the forefront. 1973 and 2022 both reveal the inherent instability and naivety of an overdependence on authoritarian, arbitrary regimes. Indeed, the intimately interconnected nature of economic globalisation renders it difficult to avoid the lure of regimes such as China and resource rich nations of the Arab region. Nonetheless, the Russia-Ukraine war must surely stand as a warning for Western economic over-dependence. Recent developments in the Taiwan strait have instigated fears over semi-conductor shortages, with 90% of the worlds most advanced semi-conductor chips produced in Taiwan alone. This could mean no phone, fridge or TV production. Are we seeing the end of a golden-era for Globalisation?
The on-going crisis has highlighted key discussions around energy consumption and sources. Perhaps most glaringly, it is revealed the indispensability of fossil fuel consumption for the functioning of the current world economy. The use of fossil fuels is fundamental in the energy intensive production of fertilisers, along with the production of key materials such as plastics and steel. In turn, it has reinforced an understanding of the economic disruption that de-carbonisation will present. Is there a positive to be found in the foregrounding of energy consumption within political discourse? Certainly, however, the long-term, maturity of discussion around the necessary trade-offs of climate change stands at odds with the myopia that has engulfed UK politics. An acceptance of the challenge and sacrifices required for the energy transition is not something that politicians seem willing to admit.
The cost-of-living crisis is not an isolated emergency, rather it is deeply interconnected with global economic and political developments. It has revealed the lessons missed regarding the potential for economic meltdowns in a framework of fragile geopolitical dynamics and overdependence. It has further illuminated the delicacy of a hyper-globalised world and reignited nationalistic, protectionist sentiment. On a domestic level, the crisis has acted as a sad reminder to the public of the inadequacy of those in power and their complete detachment from the reality most people face. The absence of realism and humility in UK politics is endemic, at the cost of continual, catastrophic political errors. If there is a positive to be taken from a national emergency, it is that crises provide fertile conditions for change. One can but hope that this occurs on a domestic level as well as a global scale; the clock is ticking on the climate change fuse. I’m reluctant to admit that there might have been a large slice of truth (not cake) when Hegel stated that ‘we learn from history that we do not learn from history’.
Image credit: Bundesarchiv, Bild 183-R1215-506 / CC BY-SA 3.0 de