Inflation is the real lockdown scandal

No. 10 was an endless series of parties. The Chancellor was more interested in socializing than sorting out the economy. And the Prime Minister was imposing rules on everyone else that he cavalierly ignored himself. It remains to be seen whether Boris Johnson and Rishi Sunak can survive the fines handed out for breaking the lockdown rules and the public anger over their behaviour. And yet, in reality, there is a far larger lockdown scandal and one that will cause far more lasting political damage: inflation.

The ‘partygate’ scandal, and its fallout, has distracted attention from yet another sobering set of inflation statistics. Today we learned that prices are now rising at an annual rate of 7 per cent, up from 6.2 per cent last month. That is the fastest rate in 30 years and well above the rate at which earnings are going up. 

Admittedly, the British rate is still slightly lower than most of the other major economies (it is 8.5 per cent in the United States, 9.4 per cent in Spain, and even 7.3 per cent in Germany). But that will mean very little to the average family starting to wonder how they are going to pay for soaring petrol, utilities, food, and clothing. Living standards are starting to be squeezed and to a far greater extent than they were in the aftermath of the financial crash of 2008 and 2009. People are already starting to notice that they are poorer than they were a month ago, and that is only going to get worse.

In reality, we are now paying the cost of lockdown. You don’t exactly need to be Milton Friedman to work out that when you massively increase the amount of money in circulation, at the same time as dramatically restricting the ability of the economy to produce stuff, while also paying a few million people to stay at home for a year watching Netflix and baking sourdough bread, then prices start to escalate very quickly. 

It is interesting to note that the one economy that did not lockdown to the same extent as the rest of the world, Sweden, is only seeing a modest uptick in prices (Swedish prices are rising at 4.5 per cent annually). True, the price of energy, and the over-enthusiastic pursuit of net zero, have also played a role. But that is often exaggerated, especially by finance ministers looking for someone else to blame. In fact, oil was above $140 a barrel in early 2008, much higher than it is today in real terms, without causing a surge in inflation. Gas supplies from Russia are an issue, but that is only a relatively minor component of the overall rise in prices. The real explanation is that we shut down our societies.

Of course, Johnson and Sunak were far from the only leaders to lockdown their economies. Almost every major country imposed draconian restrictions in an attempt to control the spread of Covid-19. And in fairness, the UK started to ease some of the rules and get life back to normal before some of our rivals. But they were certainly among the most enthusiastic proponents of the policy. In effect, they are responsible for the dramatic upsurge in the cost of living. And over the next year that is likely to hurt them a lot more than partygate – and rightly so.