Michael Wickens's picture
Affiliation: 
Cardiff Business School & University of York
Credentials: 
Professor of economics

Voting history

The Impact of the Russian Invasion of Ukraine on the UK Economy

Question 3: Relative to tax plans at the beginning of the year, the UK government should respond by:

Answer:
Cutting tax rates, but allowing revenues to increase via inflation
Confidence level:
Confident
Comment:
It is essential to allow prices to rise as explained before. And inflation will reduce the real burden of borrowing to fund tax cuts. The question is whether tax cuts are the best way of ameliorating the problems of the poorest. Probably not. Tax cuts are best aimed at increasing general demand and growth, not helping the poorest as they pay little tax.

Question 2: Relative to the public spending plans at the beginning of the year, the UK government should respond by:

Answer:
Increasing public spending, but less than inflation
Confidence level:
Confident
Comment:
See first answer

Question 1: Relative to the Bank of England’s planned trajectory for interest rates at the beginning of the year, the Bank should respond to geopolitical events by:

Answer:
Raising interest rates more slowly
Confidence level:
Very confident
Comment:
The Bank is already behind the curve on interest rate increases. The current price rises due to the new and further supply shortages can be seen as the global market's attempt to adjust demand to supply. A reduction, or holding back planned increases, in interest rates would only increase UK demand when what is needed is a fall in demand. This is what the UK did in the 1974 oil crisis which resulted in the UK having higher inflation than other countries. It was later widely acknowledged that this was the wrong choice. The best the UK can do is reduce the burden on poorer families through fiscal policy.

Surging Inflation in the UK

Question 2: Will the inflation surge of 2021 prove persistent?

Answer:
Yes
Confidence level:
Confident
Comment:
Yes because they will continue to be accommodated by monetary policy. Monetary policy should instead just accommodate the first round effects.

Question 1: Which of the following factors is the primary reason for the rise in inflation in 2021?

Answer:
Supply constraints
Confidence level:
Very confident
Comment:
Clearly there have been price rises due to supply effects. (The main point of zero emissions policy is to deter carbon energy use by reducing its supply resulting in it being more expensive.) But whether such price rises on their own should be referred to as inflation is debatable. I would describe inflation as the persistence of price rises due to second and third round effects such as wage increases in an attempt to maintain real incomes and subsequent price rises due to higher labour costs. In theory shocks to the economy such as supply shocks will result in different relative prices (including real wages) in the new equilibrium but not inflation (a persistent rise in prices) unless accommodated by monetary policy. There may be short-lived dynamics of adjustment to the new equilibrium which could be interpreted as temporary inflation. The policy issue is to allow these price changes but to avoid them being persistent.

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