Several recent news stories addressed the UK’s inflation, as the Consumer Price Index rose from a 2.1% year-on-year increase rate in May to a 2.4% rate in June. Many headlines pick out Brexit as a principal cause of these increases, as a shortage of cheap skilled workers formerly recruited from Eastern Europe impacts prices.
In the main, however, inflation is more easily accounted for by the pandemic. When workers are forced to self-isolate for days after receiving a notification from the NHS app, even when they and the majority of the population have been vaccinated, then supply chains will naturally come under extreme pressure.
Furthermore, as the furlough scheme will remain in some form until the end of September, it creates friction in the labour market, as employers have few incentives to cut unnecessary labour and employees have fewer incentives to switch jobs. There’s also the demand side to consider. As consumers flock back to high streets, and both fiscal and monetary policy remain loose, some measure of demand-side pressure is probably also a factor.
Moreover, inflation is a global and not a solely UK problem. US inflation has risen to the highest level in a decade, as consumer prices year-on-year soared to a 5.4% increase in June. The FT reports expectations that Eurozone consumer price inflation may reach 2.5% later in the year, and is expected to have reached 2.2% in July. Pandemic-related labour shortages have hit logistics sectors across the world (such as shipping), while semi-conductor shortages and price rises from Chinese factories threaten to drive up the cost of physical inputs.
Inflation is also still pretty low. It’s relatively close to the Bank of England’s official target of 2.0%, compared to the 9% it reached in the 1990s. All of this suggests that stories picking out a shortage of Eastern European labour as the central driver of inflation show substantial ignorance – or a journalistically-dubious selectivity with the relevant facts.
As a final note, it’s worth stating that the asset price inflation of the last decade, along with other factors, left real wages stagnant for British workers. Some level of labour price inflation, therefore, represents a net gain for working households.
Conversely, scare stories about shortages of workers and suffering consumers are at least partly the result of employers’ self-interest. Many employers would like to see the old status quo of cheap European labour restored, and are lobbying vigorously for relaxed immigration controls. And although it is perhaps normal now to see left-leaning Labour Remainers in alliance with big business to undermine workers’ bargaining power, it’s no less jarring for that.