Inflation is back, and according to an article in the FT today, 'policymakers' face a difficult decision between growth and keeping inflation under control.'
While no government will admit this, I believe that only governments can produce inflation by increasing the supply of money beyond the economy's ability to create output. However, we are not powerless to mitigate risks; we can offset some dangers by driving up productivity and passing raw material costs to the person up the chain, which this article will discuss. Some members are reluctant to do this, but if raw material costs are more than just a bottleneck, we would advise members to start planning now.
Inflation at modest rates is a hidden way of collecting taxes, a convenient solution for politicians who spend more than they collect in taxes. However, inflation is starting to have real-world implications within the manufacturing sector, as indicated by the rapid increase in the costs of raw materials. Whilst demand is up across the board, these new material costs could be a bottleneck or an early warning of more medium-term price risk, which will need to be factored in and managed.
Many members have managed to pass on raw material increases to their customers, even in the notoriously tight margins of the automotive sector. I would, however, urge all members to plan to negotiate new terms; yes, you may be busy, but how profitable is it? If these recent increases are more than temporary, can you absorb those costs and for how long?
Members who have enjoyed success regardless of the shortages include TWP Manufacturing and EGL Vaughan, specialising in low-volume runs or producing original products and selling direct to consumers alongside other activities.
Other ways in which members could outpace inflation could be to improve productivity in their business. A 2 per cent gain in productivity, depending on the type of business, could offset a further 2 per cent rise in inflation.
Productivity is not the cure to high inflation, but it is the only thing that's in our control; as business owners, we have to offset inflation risks to protect prosperity. At the same time, many scapegoats get blamed for inflation, from energy moguls, capitalists, disruptions to supply chains and cheap labour countries.
In truth, the origin is more straightforward; during the pandemic, we reduced production yet increased the quantities of cash in the market.
The USA went bolder than other countries; 1 in every 5 dollars in circulation is from the pandemic stimulus package. The decoupling of money with its production unit could mean inflation is here to stay for at least the medium term. Whichever government tackles this problem will be making some very unpopular decisions.
Whilst printing money creates an instant result, in the medium and long term creates a debt to pay in the future.
The UK Government, at its peak, were paying out 2billion per month during the height of furlough. Initiatives such as 'Eat Out' further stretched the public finances.
I would urge the government to consider some creative schemes such as a 'Green Sovereign Manufacturing Investment Fund' to invest in more significant projects with a social yield that makes sense economically. And let's go big on productivity; we are way behind where we should be. We need to start investing in automation, energy transformation and the circular economy; this may require the government to invest in the sector via grants. After scrapping the 'industrial strategy, it's not too late to do the right thing by British industry; let's get a minister for manufacturing in the cabinet, as called for by many in the sector, including our former president Christopher Greenough, its the 'least' this government can do.
Whilst writing this article about inflation, I reflected on an industrial strategy meeting attended by 40 members way back in 2017.
The session was led by Lord Whitby and hosted at Birmingham City University. The ideas generated seem more relevant now than ever and could help Britain navigate the volatility of inflationary pressures. You can also view the document and download it by logging onto the made platform www.madeinthemidlands.com/login or madeinyorkshire.com/login - goto the resources link from your user navigation and go to other resources. Iv added the document to this folder.
Many good ideas never get realised, and many bad ideas that do. When we waste money on initiatives such as 'eat out, it disproportionately affects people on low incomes in the future; in that respect, the help during the pandemic was almost a placebo for the poor; in the long term, they will pay the highest costs.
We are in a new era that will present the western world with massive economic and welfare issues. So what's the answer? In the UK, we have more than four million privately owned businesses; these captains of industry must work together, share best practices and innovate. The UK and much of the western world is unique globally; this dispersed intelligence and innovation, which can only really come from the ability to think freely, is our USP. For this reason, I am very optimistic that Britain will not only emerge from the pandemic, but we will emerge stronger than before, not due to any winds from the current or future government but through our ingenuity, resilience and our collective intelligence.