In Whose Interest?

To understand who MPC policies are designed to benefit, we just need to listen to what officials have been saying out loud. Early last year, Andrew Bailey said workers shouldn’t be asking for wage rises to keep up with the cost of living, implying that workers should sacrifice their wages to tame inflation. According to ONS data, workers have done just that, with total real pay falling by three percent as compared to last year. This comes after over a decade of stagnant pay for workers in the UK, with inflation-adjusted earnings only just recovering to pre-2008 levels in late 2020. A little over a year after Andrew Bailey’s comment, another MPC member, Huw Pill, said that people and businesses were reluctant to accept that ‘yes, we’re all worse off’.  

A cursory glance at corporate profit margins indicates this statement isn’t quite true. There are businesses and shareholders becoming much better off at the expense of everyone else. Shell and BP have both made record profits of £32 billion and £23 billion, respectively, while British Gas tripled its profits to £3.3 billion in 2022. In total, gas and electricity producers are expected to make £170 billion in excess profits over two years. And it isn’t just energy companies. Profit margins for FTSE350 companies were eighty-nine percent higher in 2022 than in 2019, with leading supermarkets Tesco, Sainsbury’s and Asda making combined profits of £3.2 billion in 2021. According to a report produced by Unite The Union, container shipping profits were £62 billion in 2021, up an astounding 20,650 percent since 2019. The report also showed that the profits of the four giant agri-businesses that dominate global grain markets were up 255 percent. 

Banks have also been benefiting from the inflationary chaos wrought by climate breakdown, supply chain disruptions and oil and gas shortages. Higher interest rates, which do nothing to address the supply-side issues that are enabling corporate profiteering, have the consequence of increasing bank profits. The big five banks in the UK (Barclays, HSBC, Lloyds TSB, NatWest and Standard Chartered) posted profits near £40 billion in 2022 and are set to receive a further £150 billion over the next six months, just for holding reserves at the central bank. Higher profits for banks means rising salaries and bigger bonuses for bankers, now estimated to be the highest since 2008. Perhaps not coincidentally, big pay-outs for banking bosses have coincided with a continuing boom in the sale of luxury goods. 

Meanwhile, household debt in the UK is now over £2 trillion after a big jump in risky borrowing since last year. On the other side of higher bank profits is higher debt servicing costs for borrowers—which is part of the Bank of England’s plan to control inflation. Higher interest rates add more to repayment costs for households, further reducing their disposable income, which is supposed to put downward pressure on demand. But many households have already cut back on all but the essentials, so rather than reducing demand, high repayments on loans and mortgages just force people to take on more debt (and pay more back on that debt) to keep up with the rising cost of living.  

Around eighty percent of the debt is tied to home purchases, meaning higher rates present a serious hit to around one-third of the population who have mortgages on their homes. As mortgage repayments have increased, so too have rents—up fifteen percent in London last year and twenty-five percent in Manchester—indicating that some landlords may be passing on higher buy-to-let mortgage repayments to tenants. It is only the one-third of households who own their houses outright that might benefit from a higher interest rate policy, due to them being net savers rather than net debtors.  In short, the Bank’s decision to increase interest rates represents a political decision to protect lenders and savers at the expense of debtors and wage earners.  

Clearly, higher interest rates do more harm than help for the majority of people—but there is an alternative way to get prices under control. 

An Alternative to Becoming Poorer

It is important to note that higher interest rates are not an inevitability with rising inflation. The Bank of England’s independence was only granted in 1997 by Gordon Brown in an attempt to reassure bond markets that an incoming Labour government would be fiscally responsible. Before this, a government could choose to ‘run the economy hot’ by keeping interest rates low and letting wages keep pace with inflation. After all, the two percent inflation target is completely arbitrary and was only adopted more widely around thirty years ago. If wages rise in line with inflation, then workers don’t face any real loss of income. However, inflation does cancel out interest on debt, which is good for debtors (like some households or the government) but bad for lenders or investors in household loans, mortgages or corporate and government bonds. As such, Hunt’s concern for ‘stability’ is regarding the stability of returns on investment, not the stability of ordinary households. If the government were serious about controlling inflation for the benefit of ordinary people, a much more effective and direct route would be through price controls.  

The main argument against price controls is best captured by the economist Friedrich Hayek in his book The Fatal Conceit. Hayak argued that economies are too complex to plan, and as such, markets had ‘culturally evolved’ over time as a way to sort and allocate resources in society. To tamper with this through government planning, such as price controls, would only disrupt the price-signalling mechanisms needed for capitalists to know where to allocate investment. Higher prices mean higher profits, which supposedly incentivises capitalists to invest in a way that increases supply when there is a mismatch with demand. Thus, in the long run, supply should increase, and prices should come back to stabilise at their ‘natural equilibrium’. 

As is evidenced by the rampant increase in share buy-backs that have coincided with the recent opportunistic profiteering by UK and global corporations, Hayek’s theory doesn’t play in practice. His vision was predicated on the assumption that the state would create institutions that enforce competitive markets and protect property rights. Despite the best efforts of neoliberal policymakers to realise Hayek’s vision over the past fifty years, the reality remains quite different. Many markets are increasingly dominated by a small number of very large firms. For example, Amazon accounts for nearly forty percent of the online retail market, while Apple has around thirty percent of the market in mobile phones. There is competition between large firms in these markets at times, but it isn’t perfect competition. Consequently, periods of instability create the opportunity for collusion and price gouging. As such, there is little incentive for firms during these periods to invest in increasing supply. Instead, they opt to pay higher returns to shareholders.  

Contrary to the way inflation is often portrayed, there is no physical law forcing prices to rise when supply doesn’t meet demand—it is a choice by producers. To allow corporations to raise prices under the false belief that market signals will incentivise capitalists to invest in supply shortages is utopian. Price controls aren’t without their own complications, but they have been successfully implemented and sustained in the past. More importantly, they represent a fairer way to address inflation than forcing the economy into a recession, which would create unemployment and misery for millions.