American financial experts, mainly investors and economists, expected to see inflation moderate in May. Instead, what they saw was inflation accelerating again, creating an “ugly”, “unwanted surprise”. That makes it apparent that the Fed is going to have to take drastic actions yet again to slow the fastest inflation growth in the last four decades. There was hope in recent months that inflation had already peaked, hence why further acceleration is downright frightening. This will be a political vulnerability for President Biden, as correctly or not, voters almost always blame sitting presidents for inflation. This also means that the Fed will have a lot of pressure to continue increasing interest rates in the next few months. The Consumer Price Index data showed mounting evidence that the war in Ukraine was continuing to push the prices of food, gasoline, electric power and other staples higher. Costs for staples like eggs, meat and bread soared, with an index measuring the price of food at home registering its largest annual increase since 1979. Inflation in services, like housing, remained high. Inflation in consumer goods — which administration officials had hoped was slowing as supply chain snarls are worked out in sectors like automobile manufacturing — surged anew after a spring slowdown. The longer this current bout of inflation lasts, the worse things will get for the global economy.
Even though things are rough in the US, things may be worse in the UK. In Britain, average annual GDP growth over the decade preceding the Great Recession was 2.7%, but the new normal is now closer to just 1.7%. Plenty of countries suffered from the Great Recession and the pandemic-related recessions. But Britain’s problems run deeper. In 2022 GDP per head will be more than 25% lower than America’s, measured at purchasing-power parity. Britain has been declining against America and Germany since the mid-2000s. Average wages now lag behind America’s by about as much as Poland’s do Britain’s.
Underlying this is feeble productivity. In the decade to 2007, British productivity growth was second only to America’s in the G7. In the decade to 2019, growth in output per hour worked stalled to just 0.7% a year, making Britain the second-slowest in the G7; only Italy was slower. Had Britain’s productivity growth rate not fallen after the financial crisis, GDP per person in 2019 would have been £6,700 ($8,380) higher than it is.
At least in the short run, Brexit has made matters worse. Business investment is lower than when the referendum took place. Since the end of 2020 firms trading with the European Union have faced extra paperwork, customs delays and higher taxes. In the last quarter of 2021 Britain exported 16% less than at the end of 2019. Global goods trade, by contrast, grew by nearly 6%. The outlook is poor, too. The OECD predicts that next year GDP in Britain will be stagnant. Official forecasts show that real take-home pay will be lower in five years than it is today, eaten away by higher taxes and consumer-price inflation that, at 9%, is the highest among big rich economies.
Part of the problem is that boosterish politicians talk so much nonsense about growth. The statistics are noisy and complex enough for a clever civil servant to find a number that paints Britain in a favourable light. Don’t be fooled. Self-delusion stifles fresh thinking about policy, one reason Britain’s economic debates have been tangential to growth, harmful even. For most of the 2010s politicians obsessed about cutting deficits. Budget discipline is important, but hardly a cure for Britain’s ills.