'The UK inflation rate is high because of failed government policies'

Prem Sikka is an Emeritus Professor of Accounting at the University of Essex and the University of Sheffield, a Labour member of the House of Lords, and Contributing Editor at Left Foot Forward.

A high rate of inflation is choking the UK’s economy and eroding people’s purchasing power. The UK government’s simplistic policies are adding to the misery.

The UK annual rate of inflation measured by consumer price index (CPI) is 8.7%, and 11.4% when measured by retail price index. However, food prices are rising by the rate of 15.4% a year, inflicting hardship on millions.

The government blames the Covid pandemic and disruptions to energy and food supply chains caused by the war in Ukraine for the higher rate of inflation. But that is not the entire story. Other countries have suffered from the same too, but their rate of inflation is lower. For example, the UK inflation (CPI) rate of 8.7% is higher than Luxembourg (2.7%), Belgium (3.3%), Spain (3.8%), Greece (4.5%), Denmark (5.6%), Netherlands (5.8%), Ireland (6.3%), Finland (6.3%), France (6.9%), Portugal (6.9%), Germany (7.6%), Sweden (7.7%) and the  EU average of 7%. For 2023, the UK is expected to have a higher rate of inflation than the US, Japan, Germany, France and the EU.

The UK inflation rate is high because of failed government policies. Brexit has increased business costs and prices. Yet the government remains silent on its impact. Instead, the Prime Minister and the Bank of England blame wage increases for higher inflation. The CEO of grocery chain Aldi blames increases in the minimum wage for food price inflation.

The above is not supported by evidence. The average regular pay growth for the private sector was 7.0% in January to March 2023 compared to 5.6% for the public sector. Despite economic growth, the average real pay of workers is lower than what it was in 2007. Around 14.4m Brits are living in poverty and 3 million rely upon foodbanks for survival.

Unchecked corporate profiteering is the real reason for high inflation. Energy companies have excelled. The cost of producing oil and gas has not changed significantly, but the market price has. In recent months, Shell reported profits of £32bn, the highest in its 115-year history. BP reported record profits of £23bn. British Gas reported £3.3bn profit for 2022, more than tripling its 2021 profits. National Grid, responsible for running most of the power grid, made record profits of £4.6bn. Indeed, UK gas producers and electricity generators are expected to make £170bn “excess” profits over two years.

Energy companies have used higher profits to increase executive pay, shareholder dividends and share buybacks and deepen inequalities. For example, the CEO of Shell collected £9.7m last year, a 53% pay rise; equivalent to 294 times the average UK wage. In 2022, Shell handed $26 billion to shareholders in dividends and share buybacks, and is expected to return another $12 billion in the first half of 2023.

Almost every sector has joined the profiteering frenzy. Leading supermarkets Tesco, Sainsbury’s and Asda made combined profits of £3.2 billion in 2021, double the pre-pandemic levels. Profit margins at FTSE 350 companies for the first half of 2022 were 89% higher compared to 2019. Between 2019 and 2021, the four global giant agribusiness corporations (ADM, Bunge, Cargill and Louis Dreyfus), which dominate crucial crops such as grains, increased profits by 255%. Top ten semiconductor manufacturers increased profits by 96%. Eight top shippers (including Maersk, COSCO and Hapag-Lloyd) boosted profits by 20,650%. Profits of the biggest road freight operators increased by 149%. Broadband and mobile phone companies have increased prices by over 17%. Major hedge funds have made profits of £1.5bn by placing clever bets on the cost of food to spike prices.

Profiteering filters through prices to increase the rate of inflation. There are no curbs on profiteering. Instead, the government has hiked interest rate to 4.5%, the highest in 15 years, to remove cash from the economy to tackle inflation. This has increased mortgage interest payments and rents. The policy assumes that people are awash with cash. That is not the case as wages have long been depressed. Indeed, workers’ share of gross domestic product, in the form of wages, has declined from 65.1% in 1976 to  around 50% in the first quarter of 2023.

The interest rate policy transfers wealth from the masses to the finance industry. People are forced to hand more money to banks. In 2022, major banks increased profits to around £40bn, resulting in higher exec pay, dividends and share buybacks; and more speculation on commodities and securities. Higher interest rates increase returns on financial assets and make the rich richer.

Instead of increasing interest rates and hurting innocent parties, the government needs to remove excess cash from profiteering corporations and the rich. A government that can control wages can also control prices and curb profits, but political parties funded by corporations and the rich don’t show inclination to do that.

The government should discipline profiteers by refusing to award public contracts to abusive corporations. It can levy 100% windfall tax on “excess profits”, and higher rates on tax on dividends and capital gains. It can democratise corporations by empowering workers and consumers to vote on executive pay and check the addiction to profiteering.

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