Howard’s flight: inflation and deflation. Both can be problematic. So how should they be managed? – News Block

Lord Flight is a former Shadow Chief Secretary to the Treasury.

In a very real sense, the experience of inflation largely determines how citizens spend the money available to them, reflecting the importance of a particular expenditure in certain areas of their lives. In addition to the relative importance of particular areas of spending, there is the participation of the government. Citizens do not manage, increase or decrease, their health spending, largely because the government pays all or most of it for citizens.

On the contrary, in difficult times, citizens reduce their expenses on dentistry despite the fact that it is partially subsidized by the State. The bottom line is that inflation squeezes citizen spending, with an inflation rate higher than wage increases, as a result of inflationary pressures.

This is the area where inflation ‘catch up’ with governments and citizens. In the early stages of inflation, governments can increase the money supply to absorb most of the inflationary pressures. As inflation accomodates and does not abate, government ‘print money’ is likely to worsen inflationary pressures, as we have experienced in the UK.

It is up to citizens to decide which areas of spending to restrict or reduce as they feel the pressure of inflation. The expectation is that citizens will maintain spending on ‘necessities’ by reducing spending on luxuries. However, necessities and luxuries are different for different categories of individuals in terms of what they consider to be necessities and luxuries. Decisions about which areas of spending to reduce and which to maintain are made by citizens, but under the pressures of economic developments and inflation.

It is worth focusing on the impact of inflation in some of the different areas. Food spending has been constrained by eating less expensive foods and consuming smaller amounts of certain foods. Education is hardly affected as governments provide it for the most part free of charge.

However, spending costs are beginning to have an impact on the demand for higher education, which has become significantly more expensive over the past decade. The government’s target of at least 50 per cent of young people attending university is increasingly unrealistic where disposable incomes are falling and most ‘graduates’ cannot earn an income to start paying their tuition. student loans.

Housing is possibly the area with the greatest impact on spending. As we have seen, where prices continue to rise and the cost of borrowing increases, albeit with a lag, the demand to buy houses has to focus on relatively cheaper housing and, in time, could decline significantly.

There are also areas of spending where inflation can have a significant secondary impact. For example, citizens marry and have children later, as inflation has made it worse for them to bear the costs of a family.

In general, inflation automatically has a large impact on demand if inflationary pressures are to be reduced. Where we are now is where the impact of inflation is reducing demand/spending. This, in turn, is intended to reduce the rate of inflation as citizens no longer have the cash to finance rising inflationary costs. In the early stages of inflation, citizens will be willing to increase their debt to maintain their standard of living. Typically, we then move into the current inflation phase of borrowing more to finance the increased costs due to inflation.

However, it is clear that the Bank of England should have raised interest rates sooner to avoid an inflation crisis.

As for deflation, it is worth focusing on the 1930s in Britain, when deflation slowed demand, largely through delayed spending. There is some danger that trying to control inflation could lead to deflation, if not handled carefully.