INFLATION is never good, but it could help cool the Island’s housing market and give wages and salaries the chance to catch up, the government’s chief economic adviser has said.
In Saturday 15 July’s JEP Weekend Essay, Tom Holvey offers his insights on what has driven inflation to record levels (12.7%) and what levers are available locally to help bring the cost of living down.
He argues that the majority of the pressure causing prices to rise has been imported from elsewhere, but he says that ‘it is not all bad’.
‘The UK is currently experiencing high inflation and low growth, often termed ‘stagflation’, which is always bad. Jersey, on the other hand, is experiencing growth aligned with inflation,’ he writes.
‘With higher interest rates cooling the housing market in the Island, there is potential for wages and salaries to start catching up with house prices. This wouldn’t be a bad thing for the economy.
‘You will never hear me say inflation is good, but with every set of economic circumstances we should always try to turn things to our advantage and there might be a little positivity to come from the currently painful circumstances.’
Mr Holvey also addresses two issues which have sparked significant debate and have been blamed for stoking inflation in Jersey – public-sector wage rises and a planned 12% increase in the price of electricity, which is due to come into force on 1 January.
‘There has been a lot of discussion around public-sector wage rises with regard to inflation pressure. Firstly, it is important to note that public-sector wage rises are funded by taxes and not by increases in the cost/price of goods or services.
‘As such they are not inflationary themselves. However, private-sector wage rises (which are inflationary because they are paid for through higher prices for goods and services) often take their lead from wage rises agreed for the public sector and so high public-sector wage rises can lead to higher private-sector wage rises and inflation.
‘Wage rises also increase spend within the economy and this can add to inflationary pressures. At the same time, wage levels are one of the solutions to the wider cost-of-living issues, especially in narrowing the housing affordability gap.’
And he argues that government intervention in the energy market to cap prices, as has happened in the UK, is not the simple fix some might perceive it to be.
‘There is no such thing as free money,’ he says.
