Framing this as a “cost of living crisis” creates the misleading impression that inflation is the problem.

Our standard of living is lower for a combination of reasons: the war in Ukraine, the covid pandemic, Brexit, and structural problems in the British economy.

These hits mean that real incomes will fall. There are distributional choices to be made about whose incomes will go down and how we protect some people (by imposing bigger losses on others). There are choices to be made about whether we want to borrow to smooth out the losses over time. But there is no getting away from the fact that we are around 5-10% poorer in real terms.

Inflation is one way for the world to tell us that we are poorer. If prices rise faster than incomes, then our standard of living falls. It hits hardest people who are on fixed incomes (e.g. people on benefits and pensioners).

We could choose to suppress the inflation – for example, by increasing interest rates or by imposing price caps. This would mean taking our medicine another way – higher interest rates would mean rising unemployment. The reduction in real incomes would then be concentrated on a smaller number of people. So although it would shift the pain around, it would still mean lower average incomes.

Calling this a “cost of living crisis” tends to mask the underlying causes of our economic situation, and so generates pressure to pursue policies which address the symptoms, but not the problem.

Original source – Owen abroad

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