Declining growth and rising prices could cause ‘stagflation’

Kevin Boscher, chief investment officer at Ravenscroft Group, said that he expected the uptick in inflation to most likely be transitory but last much longer than anticipated originally. It could result in stagflation, which is a combination of declining growth and rising prices.

At the end of September 2021, Guernsey’s annual inflation – as measured by the changes in the RPIX – was 3.3%. The RPIX, which excludes the mortgage interest payment item, is the States’ preferred measure of inflation. The RPI change in September 2021 was 3.2%.

But there have been warnings inflation could hit 4% within months from Guernsey’s most senior politician Peter Ferbrache.

Mr Boscher said higher inflation would ‘materially impact Guernsey for the next six to 18 months at least’.

‘I expect the supply and labour shortages to last for some considerable time and some of them may even be more permanent. I think that this will be a big issue for Guernsey and will negatively impact our economy in lots of ways.’

Higher inflation and costs meant that the average person had less to spend in real terms unless they took on credit or draw down on savings.

‘This means falling real incomes and declining standards of living. It also worsens income inequality and may lead to more net emigration given our already high living costs,’ said Mr Boscher.

‘From a business perspective, it means pressure on margins and profits from rising input costs including wages, raw materials, energy etc. Some businesses may not survive this while others will pass it on in higher prices. Lower profits means less income and corporate taxes.’

He also warned that these pressures would be made worse if two key policy levers were pulled nationally and internationally – the Bank of England seriously considering raising interest rates and downward pressure on sterling.

Warnings about inflation have also been sounded by Philip Shaw, chief economist at Investec, during a recent visit to Guernsey.

Mr Shaw said inflation nationally was expected to rise further towards 4% before coming down again in the second half of 2022, with the Bank of England’s Monetary Policy Committee wanting to raise the bank rate first to tackle inflation. This could see the rate rise from the current 0.1% to 0.25%, then on to 0.5% and possibly aiming for 1% by the end of 2023 – potentially as soon as the MPC’s next meeting in November. What happened in the labour market was key to the inflation question, he said.

Mr Shaw did note that households nationally had built up a buffer of savings of £150bn.

Deputy Ferbrache has also recently warned about inflation when he spoke during a Chamber of Commerce event discussing labour shortages locally.

‘Inflation is already going up. Inflation is going to be 4% by March / April next year. That is going to cause a real problem because we haven’t had that kind of inflation for years,’ said the president of Policy & Resources.