Featured Post from Aston University

GEORGE FEIGER

Jul 27, 2022

5 min

Inflation: Simple Causes But a Complicated Cure



 JULY 2022


We face a wave of strikes, intended to restore the purchasing power of wages in face of inflation. But strikes cannot succeed in restoring everyone’s purchasing power. In the near term, inflation’s impact on living standards can be significantly mitigated only by importing more and so increasing our trade deficit, financed by foreign borrowing. Unwillingness to do that means we are likely to prolong the wave of strikes and so suffer a bruising recession created by restrictive monetary policy. This will cause yet more damage to living standards.


However, debt-funded importing of consumption items in order to maintain living standards is poor policy longer-term. It can’t stop the harmful redistribution effects of inflation that are already emerging. Most important, it doesn’t address the longstanding source of our lagging living standards – too little economic growth and economic resilience due to our failure to grow productivity. Without increased productivity, debt-funded consumption repair will cumulate to tomorrow’s fiscal crisis.


Therefore, we face a very difficult policy challenge. We must act to support living standards over the next year or two, mitigate the social problems that inflation is already causing and, simultaneously, divert our priorities (and our continuing borrowing) to foster much improved productivity growth.


Causes



This is a simple story. Today’s inflation demonstrates that we are poorer than we were three years ago. The value of what we, collectively, produce and earn, has shrunk, relative to the cost of the things that we seek to consume. Inflation constricts our consumption options to what we can now afford.


We are poorer for two reasons. First, because we produce and earn less domestically, and second, because the things that we don’t produce but import have become scarcer, forcing us to pay more to get them.


• Brexit caused an immediate and seemingly permanent devaluation of Sterling, raising the costs of everything that we import. It also seemingly permanently reduced our exports to the EU, our largest trading partner. No new trade possibilities are similar in scale, so there is a long-term loss of income. Moreover, increased non-tariff barriers have raised the cost of imports from the EU beyond the exchange rate effect.


• The pandemic has reduced the worldwide supply of all sorts of goods, therefore raising their prices. This is due to supply chain problems, the zero-Covid China lockdown, the reduction in UK output because a significant portion of the population is out with Covid at any time. Crops are left rotting in the fields because there aren’t enough domestic agricultural workers and, of course, no more EU farm workers.


• The war in Ukraine has escalated the costs of energy and food grains. In the future it will propel redirection of domestic resources to the production of war material, which is not edible.


Consequences



Inflation not only makes us, collectively, poorer, it differentially distributes the pain.


• Everyone in the UK could go on strike to try to raise their wages enough to maintain their real consumption. But as the pie has shrunk, that is impossible. The extra money people get will simply chase the same, smaller amount available and the prices of goods and services will rise further. If the ensuing price rises provoke further wage increases, we chase our tails. This is the wage/price spiral that the Bank of England fears.


• Some groups have more wage bargaining power than others. Perhaps the railway unions can indeed hold the country to ransom and regain their purchasing power. But then others, less empowered than railway workers, will become greater losers.


• Inflation causes a flight to real assets – houses, commodities – whose values float up with the price level. Because ownership of real assets is very unequally distributed, the asset-rich minority is likely to come out better than before while the asset-poor majority lose even more. The purchasing power of people living on fixed-return assets such as retirement annuities would be devastated by a wage/price spiral. Similarly, as interest rates rise with the price level (or even faster if the Bank of England has its way), debtors on floating rate loans will be hit hard.


• Different geographic areas have different mixes of people who would be gainers and losers from a wage/price spiral, exacerbating our substantial regional inequalities.


Cure Part 1: Near-Term Mitigation



How is it possible to offset the fall in current consumption which is provoking the wage/price spiral? People can consume more than they earn only by borrowing. The key is how that borrowing is undertaken. Households could borrow from private UK lenders, or the state could sell bonds to UK citizens and give the proceeds to other UK citizens to spend. But if all they can spend it on is the total value of UK output, that pie is shrinking. More money from borrowing would only raise prices, that is, add to inflation.


Total UK consumption can exceed the value of UK output only if the extra is imported. Because the imports are paid for in another currency, borrowing to pay for those imports must be borrowing from foreign sources. The debt (public and private) that the UK owes others must rise by the value of the excess consumption.


However, consuming more today by adding to our overseas debt isn’t a miracle cure.


• Not everything can be imported. Domestic services of all types are provided, well, domestically. GP visits and houses and hotel rooms and haircuts will cost more as a result of wage inflation, no matter the amount of net foreign borrowing. These price increases will continue to provide some impetus to a wage/price spiral and make it more likely that the Bank of England will end up pushing the economy into recession to stop it.


• The problem with debt is that you have to pay it back, and in the meantime, you pay interest on it. More consumption today means surrendering a greater amount of potential consumption in the future. Only if there is strong UK productivity growth will this foreign debt repayment not cause significant future trouble. Sadly, the UK has lagged in productivity growth among advanced economies for many years.


Cure Part 2: A More Productive Economy



The policy most likely to maintain social cohesion in the near term, and greater prosperity in the longer term, is a tricky two-step. We need to borrow to defend most people’s consumption in the next year or two, but then switch the budget to support growth and productivity-enhancing investment. Unless we do this, our debt repayment obligations will grow to unmanageable levels and meanwhile our level of consumption will continue to shrink relative to that of our peers.


Our political system has not been good at tricky two-steps. It can manage short-term stimulus, funded by debt. But for decades the UK has failed to invest sufficiently in physical, technological and human capital to create productivity comparable to our peers. The inflation crisis is a call to action. Not only to mitigate current deterioration in living standards but to build a modern economy that sustains rising living standards into the future.

You might also like...

Check out some other posts from Aston University

7 min

Budget 25 – initial reactions related to personal financial wellbeing

As the director of the Aston Centre for Personal Financial Wellbeing, and a professor of taxation, I obviously take particular interest in the annual budget day as it sets a tone for much of the personal finance changes that are likely to occur in the near future. The lead up to this year’s budget had unprecedented levels of speculation with much of the press and commentators trying to get attention with ever more it seemed wilder guessing of what the chancellor might do – largely unhelpfully and worrying people and the markets unnecessarily. Almost all of this proved wide of the mark as the budget didn’t increase any of the main taxes at all, and where it might nudge National Insurance contributions (NICs) up for some, this won’t be for a few years and only in a small area (pension payments for employees) that won’t actually affect most people. Small and cautious steps to reform The reason for all this speculation of key changes needed was that everyone suspected there was a big hole in the national finances. This was shown not to be the case. In fact, predictions provided in the budget documents are we’d in fact be in budget surplus by the end of this parliament period even before the changes announced take effect. This was a surprise to many and meant the chancellor could actually focus on at least some small and cautious steps towards reforming how our tax, benefit and government spending systems work. What she proposed therefore is currently predicted will raise circa £26bn and give the government ‘head-room’ to cope with economic changes later rather than needed to fill a feared financial black hole now – good news all round! This meant what we actually got was lots of smaller changes with fewer ‘rabbit out of a hat’ big tax surprises than we have had in recent years – a welcome steadying trend I hope will continue. She also promised some short-term spending that can be paid for with a combination of extra borrowing now and with increased taxes later – again a trend of recent budgets. If these tax changes actually happen in the end, then it will be down to what happens between now and when these were proposed to commence – by no means a guarantee these will ever happen. Later budgets, or other rule changes in the future, could easily retract or counter them (all chancellors like to announce planned tax changes aren’t going to happen for obvious political gain reasons!). Income tax changes The largest share of the extra £26bn raised will come from extending the income tax thresholds for a further period – now to 2031. These have been fixed (at £12,570 for example for the point at which income tax starts to need to be paid on personal incomes) since at least 2023, some well before this. This matters, as, when wages rise due to inflation, people are not better off in reality (you get more income but things cost more), but may end up paying more tax than before as the thresholds haven’t increased with inflation to the same degree (what we call ‘fiscal drag’). As such, holding these thresholds fixed for longer will raise extra money for the government (predicted to be over £12bn a year in 2030-31 for example) – largely unnoticed as to many it doesn’t feel like the tax rise it clearly is. The threshold fixing extension announced today will mean that as many as 700,000 more people will start to pay some income tax when they wouldn’t currently, and up to 1 million more people will start to pay higher rates of tax than currently – all without being actually better off in real terms. Some call this stealth tax, but it feels very real when it starts to affect you if your total taxable incomes fall near these threshold levels. There were in total more than 70 other tax measure changes in this budget – a huge number and lots to get your head around. However, most of these will not affect most people and are relatively small in nature – targeted at making the tax system a little fairer (i.e. those on higher incomes, with more savings, dividends, receiving additional income from property they own etc – paying more taxes as a proportion of the total amount raised in tax from all sources). This is clearly welcome news (at least for those not being asked to pay this extra) in the current climate. The biggest changes for financial wellbeing As a research centre focusing on individual and family financial wellbeing, what do we think are the specifics announcements made that are most likely to affect people – several headline announcements are worth highlighting: -  1. The removal of the two-child limit on benefit eligibility is obviously a key headline – long touted as a key reason larger families are much more likely to be in poverty than smaller families. This is a key change that many Labour MPs wanted to see happen and the chancellor has delivered on it. This is very welcome news – although it won’t start to affect these families until after April 2026 to give time to bring these measures into place – but then predicted to lift 450,000 children out of poverty. 2. As part of making the tax system more progressive, a brand-new tax was announced on very expensive houses in England – to be snappily called the High Value Council Tax Surcharge (or HVCTS) – although expect it to be called the ‘mansion tax’ by everyone! The UK’s main local tax (council tax) isn’t going to be reformed as such in this change – despite being the target of much speculation that it is just too regressive to leave unreformed any longer after we haven’t revalued houses in most of the UK since 1991. This will instead be an additional tax, commencing in April 28, on those whose properties are valued (now) at £2m or more – with higher rates rising to those with properties over £5m. Clearly this will affect relatively few in most of the UK (only expected to affect 1% of properties nationally), but will affect some and will raise extra revenues (expected to raise circa £400m+ a year) to directly support provision of local services – much needed in many parts of the UK. 3. New taxes on electric cars – given fuel duty is not paid by those who drive electric cars (as they don’t buy petrol or diesel) there have been calls for new taxes to be charged to electric car drivers. While these cars may be better for the environment when driven, they continue to wear roads and contribute to congestion. The government is proposing a per mile charge from April 28 (to be called the Electric Vehicle Excise Duty or eVHD) for these vehicles which will be painful for electric car divers – not least as this cost as not known when purchase decisions were made. No-one likes a tax charged on something you have already made the decision to buy so expect this to be unpopular. It is proposed currently to cost EV drivers around £20/month – about half the rate of fuel duty on average – and expected to raise circa £2bn a year by 2030-31. I expect this tax will become more nuanced in future perhaps as technology enables perhaps different charges to be applied to use of congested city roads compared to open rural driving perhaps - we will see.  4. National Insurance deductibility for pension contributions via salary sacrifice schemes operated by many employers for their employees is to be capped at £2,000 (although only from April 29 – so no immediate effect). This now very widely used approach to making pension contributions if you are an employee that in effect avoids you having to pay NIC on this income going into your pension. For those with larger pension contributions the bit that can be made before NIC is due on the extra this will be capped in the future to £2,000 per year – again affecting those who receive higher pension contributions most and affecting those at the bottom of the income spectrum, little if at all (74% of employees are predicted not to be affected). Is this a breach of the Labour manifesto promises not to increase the main taxes? For some it certainly seems that way. What didn’t happen? There are many smaller measures to explore, or ones that are not coming into effect for the next year or more that might have been missed from the news headlines but that will almost certainly affect lots of people. To name just a few (including highlighting several things NOT going to happen – which will obvious not save people money per se, but help by not costing them more): - above inflation increases to national minimum (‘living’) wage for all age groups from April 2026 (+4.1% for those over 21)– although still not raising this to ‘real living wage’ levels. further extension of holding off on the 5p/litre fuel duty rise not increasing prescription charges (staying at £9.90 for the next year) confirming state pension rises by 4.8% from next April (worth £575/year) confirming £150 winter fuel payments again this winter to over 6 million homes freezing regulated rail fares – preventing the usual annual increases from January (the first time this has happened in 30 years) extending the government’s Help to Save scheme to more benefit recipients than previously No immediate impact for most Overall, this is therefore probably a welcome budget for many, those on lower incomes will likely get the most from these measures, if all are applied as proposed, but most won’t see much of an immediate impact immediately – and with the largest benefit likely to all on larger families in receipt of benefits from next April.

2 min

How mitochondria shape brain health from childhood to old age

From the first spark of neural development to the challenges of ageing, Dr Lissette Sánchez Aranguren is uncovering how the cell’s powerhouses — mitochondria — hold the key to a healthy brain across the human lifespan. Her pioneering research at Aston University explores how these microscopic energy generators safeguard the brain’s communication network and how their dysfunction may underlie conditions such as dementia, stroke, and neurodevelopmental disorders. Mapping the brain’s energy defence system Dr Sánchez Aranguren’s work focuses on the partnership between brain cells and the blood vessels that nourish them — a relationship maintained by the blood–brain barrier. When mitochondria fail, that protective interface can weaken, allowing harmful molecules to penetrate and trigger inflammation or cell loss. Her team’s studies show that mitochondrial malfunction disrupts the dialogue between neurons and vascular cells, an imbalance seen both in the developing and ageing brain. To counter this, she and her collaborators have engineered a mitochondria-targeted liposome, a nanoscale “bubble” that delivers restorative molecules directly where they are needed most. By re-balancing cellular energy and communication, this innovation could one day reduce brain injury or slow neurodegenerative decline. From heart cells to the human mind Originally trained in cardiovascular science, Dr Sánchez Aranguren became fascinated by how mitochondria regulate energy and stress in blood-vessel cells — insights that ultimately led her toward neuroscience. View her profile here “Mitochondria do much more than produce energy. They send signals that determine how cells communicate and survive.” That realisation inspired her to trace mitochondrial signalling across the continuum of life — linking early brain development to later-life vulnerability. Her research now bridges traditionally separate fields of developmental biology, vascular physiology, and ageing neuroscience, helping identify shared molecular pathways that influence lifelong brain resilience. Global collaboration for a healthier brain Her work thrives on multidisciplinary and international partnerships. At  Aston, she collaborates with scientists from Coventry University, Queen’s University Belfast, and the University of Lincoln, alongside research partners in the Netherlands, Italy, Malaysia, and China. Together they integrate chemistry, biology, and computational modelling to understand mitochondrial function from molecule to organism — and translate discoveries into practical therapies. Towards mitochondria-targeted brain therapies The next frontier is refining these mitochondria-targeted nanocarriers to enhance precision and efficacy in preclinical models, while exploring how mitochondrial signals shape the brain’s vascular and neural architecture from infancy through adulthood. Dr Sánchez Aranguren envisions a future where protecting mitochondrial health becomes central to preventing brain disease, shifting medicine from managing symptoms to preserving the brain’s natural defence and repair systems. “If we can protect the cell’s own energy engines,” she says, “we can give the brain its best chance to stay healthy for life.”

2 min

From circular supply chains to global sustainability leadership: How Dr Luciano Batista is shaping the future of the circular economy

When it comes to transforming how organisations produce, consume, and reuse resources, Dr Luciano Batista, professor of operations management at Aston University, is a global pioneer. His research sits at the crossroads of innovation, digital transformation, and sustainability, tackling one of humanity’s most pressing challenges: our overconsumption of the planet’s resources. Reimagining the economy around renewal Dr Batista’s work focuses on circular supply chains —a model he helped establish at a time when 'closed-loop' systems dominated sustainability thinking. His early research laid the foundation for how businesses could move beyond recycling and linear take-make-dispose models, instead designing systems that reuse, restore, and regenerate.  View his profile here From theoretical frameworks to real-world applications, his studies—such as comparative analyses of circular systems implemented by Tetra Pak in China and Brazil—demonstrate the measurable economic and environmental benefits of circularity in action. His 2022 Emerald Literati Award-winning paper introduced a methodology for mapping sustainable alternatives in food supply chains, earning international recognition for its real-world impact. A global voice for industrial symbiosis and circular innovation The influence of Dr Batista’s work reaches far beyond academia. He has advised the European Commission’s Circular Cities and Regions Initiative (CCRI) and contributed insights to policymakers through the UK All-Party Parliamentary Manufacturing Group. His expertise continues to inform national and regional strategies for sustainable production and industrial symbiosis —where one company’s waste becomes another’s resource. Today, he extends that impact globally as a visiting professor at the Massachusetts Institute of Technology (MIT), conducting research at the MIT Center for Transportation & Logistics on circular supply chain innovations, supported by Aston University’s study-leave programme. He also mentors future leaders in sustainability as part of Cambridge University’s Institute for Sustainability Leadership (CISL). Driving the next wave of sustainable transformation Looking ahead, Dr Batista is spearheading collaborations through Aston’s Centre for Circular Economy & Advanced Sustainability (CEAS), working with the Energy & Bioproducts Research Institute (EBRI) and West Midlands Combined Authority (WMCA) on projects developing biochar-based clean energy systems for urban districts. He is also advancing the social dimension of the circular economy—ensuring that the move toward sustainable production is inclusive and equitable. His Symposium on the Socially Inclusive Circular Economy, held at the 2025 Academy of Management Conference, has sparked new international research partnerships with Monash University (Australia) and the Vienna University of Economics and Business. A vision for a regenerative future At the heart of Dr Batista’s work is a simple but urgent truth: humanity is consuming resources at a rate our planet cannot sustain. Through his research and global collaborations, he is helping organisations, policymakers, and communities move toward a future where growth and sustainability coexist. “The transition to a circular economy is not optional—it is essential,” says Dr Batista. “Our goal must be to redesign systems that allow people, businesses, and ecosystems to thrive together.”

View all posts
Powered by