After decades of quiescence, inflation — that insidious, silent thief — is on the prowl in Britain again, threatening to be the biggest Seventies comeback since the Abba revival.
Worse, the spectre of ‘stagflation’, rapidly rising prices combined with low growth, is scaring the markets. And no one is more alive to the peril than Rishi Sunak.
The Chancellor is acutely aware that inflation is already making people feel a good deal poorer. He knows, too, that it is hitting us just as the Tories are planning hefty tax rises from April next year to help fund social care and the NHS.
esterday, in his speech to the Conservative conference, he defended the tax hikes, arguing that it was immoral to continue piling up more debt for future generations. After the huge Covid support operation, national debt is already more than £2 trillion.
And as Mr Sunak knows only too well, each percentage point rise in retail price inflation adds about £5 billion to the government’s interest bill.
But it is not just the state that will be hit by inflation: its brutal effects on individual families are shown only too clearly by exclusive research for the Daily Mail by the Centre for Economics and Business Research (Cebr).
Using figures from the Office for National Statistics and assuming an average inflation rate of 4.3 per cent in the final three months of 2021, the research found that a typical family of four will have to spend more than £1,800 extra on utilities, clothing, leisure, transport and other costs this year, compared with 2020.
Essential spending, such as fuel and food, is on course to rise by more than £1,100. Transport alone is likely to cost nearly £500 more.
These are sobering figures. But then, it is hard to overstate the egregious effects of inflation, which impoverishes the thrifty, wrecks the dreams of entrepreneurs and rips at the very fabric of society.
When inflation takes off, household budgeting, which should be no more than a mundane chore, can become a frantic battle as prices increase in the shops.
The cruellest impact can be on pensioners and others on modest fixed incomes — those who cannot negotiate a pay rise to offset the rising costs.
According to our Cebr research, a retired couple will see their living costs rise by more than £1,100 this year compared to last, with an increase of nearly £670 on just their essential bills.
Inflation punishes the prudent, many of them elderly, by trashing the value of hard-earned savings.
If, for example, you put £10,000 into a cash Isa savings account paying a typical interest rate of 0.3 per cent, and inflation is at 4 per cent, over the course of a year you would lose around £360 from your nest-egg.
And those on low incomes will suffer badly.
A couple on just over £13,000 will see their annual spending rise by nearly £900, with an increase of more than £600 on unavoidable costs, according to the Cebr analysis.
In other words, as the research centre’s economist Kay Neufeld points out, we will all have to pay hundreds of pounds more just to consume the same as we did a year ago.
That is depressing for everyone, and very tough on those people who are already counting every penny.
It is true that the Bank of England has been insisting the recent upward trend is merely a transient phase as we emerge from lockdown, which will calm down of its own accord.
But there is no guarantee this soothing scenario will transpire, and plenty of reason to be fearful.
The main measure, the Consumer Prices Index (CPI), has already gone up to 3.2 per cent in August from 2 per cent in July. That is the highest increase since this measure began in 1997.
The Bank now admits it could hit 4 per cent by the end of the year, which is double the official 2 per cent target.
Unless prices are brought under control, it spells only one thing: higher interest rates. While a rise in borrowing costs has always been on the cards as we recover from the pandemic, there is a world of difference between raising rates in a strong economy, when people are feeling better off, and being forced into it at a time of weakness.
It would turn the thumbscrews on legions of home-buyers who have taken out large loans on the basis of ultra-cheap mortgage deals.
With household budgets coming under stress, it makes it harder for Rishi Sunak to push through any further tax increases, regardless of the size of the national debt.
Indeed, households are already facing a double whammy in the spring.
As well as the 1.25 per cent increase in National Insurance to pay for health and social care, there is also a stealth tax hike from Sunak’s March Budget which has been virtually forgotten.
He froze the personal tax allowances for five years from April, instead of increasing them in line with inflation.
This creates ‘fiscal drag’ by pulling more people into the tax net — and the higher inflation climbs, the harder that tax freeze will bite.
All this will come as an unwelcome novelty for generations of Britons fortunate to have lived through an era where they have been able to take low and stable inflation for granted.
Only those well into their 60s have experienced, as adults, the nightmare year of 1975 when inflation went to 25 per cent. The rest of us are too young to remember. Rishi Sunak was not even born until five years later.
Why, then, has inflation awoken from a long sleep?
The UK economy, like others around the world, is recovering from the pandemic, but in an uneven way.
Many people have accumulated large savings during lockdown and are keen to spend, so demand is strong.
But at the same time, there are problems with supply. Wholesale energy prices have shot up. There are widespread shortages of skilled workers, including HGV drivers, which has provoked the panic buying at the petrol pumps.
One businessman at the sharp end contacted me to say that, like many others, his bed linen firm is being hammered by runaway costs, including an eight-fold increase on costs for shipping containers.
‘A 40ft container now costs over £20,000, compared with £2,500 last year,’ he says. ‘There has been a 40 per cent value increase in cotton, whilst the actual quantity available has reduced.
‘If a retailer were to pass these additional costs onto the consumer, many textile products, such as soft furnishings and clothes, could more than double in cost.’
The worry is that raising interest rates might not be so effective against the current brand of inflation.
Rate hikes act as a brake on spending and thereby dampen down demand. But that won’t help put more lorry drivers on the road, or ease congestion at shipping ports.
One reason inflation has been so low until the pandemic struck is ‘globalisation’, which is economist-speak for the smooth movement of goods and services around the world.
This helped firms to become efficient and keep prices low, because they could rely on cheap and ultra-fast global supply chains. But the globalised, ‘just-in-time’ model has come under strain due to Covid and Brexit.
Firms have been contending with increases in the price of materials, from concrete and bricks to plasterboard, plus escalating energy and shipping costs.
Global commodity prices in July and August this year were around 55 per cent higher than a year earlier, according to the OECD (the Organisation for Economic Co-operation and Development).
Unsurprisingly, against this backdrop, UK manufacturers are being forced to push through large increases in their prices, which in turn percolate down to consumers. One key factor in runaway inflation is wages. When employees demand chunky pay rises, it can spark an inflationary spiral, as it did in the 1970s when trade unions used their muscle to hold firms to ransom.
This time, in a strange irony, it is Tory politicians who are demanding pay rises for workers, in the hope of solving post-Covid and Brexit labour shortages.
Desirable though it may be for the country to create a highly-skilled, highly-paid workforce, in the short term, wage hikes are likely to push up inflation.
For Andrew Bailey, Governor of the Bank of England, these are extremely anxious times.
One of his most important jobs is to keep inflation under control. Failure to do so is likely to result in the Bank of England’s independence coming under threat, which in turn raises the prospect of politicians setting interest rates. Perhaps some government figures would welcome such powers, but what if a loony Labour chancellor were to gain the keys to Number 11?
Taming inflation is easier said than done. To borrow from the famous economist Friedrich von Hayek, it is like taking a tiger by the tail: only to be attempted with the greatest of skill and caution.
We are nowhere near the horror of Britain in the 1970s.
As yet, there is still a chance to stop the tiger from unsheathing its vicious claws. We must seize it while we still can.