The Bank of England can do little about inflation, despite the cries of Conservative MPs

Editorial: Inflation was inevitable, but also desired, given the UK economy was emerging from Covid

Inflation can arise from the negligence and complacency of central banks (PA)

It is a measure of how panicked and confused the governing party is that it is now blaming the Bank of England for the current wave of inflation, which is set to hit double figures by the end of the year and is looking increasingly likely to run out of control. To borrow a phrase, several Tory backbenchers, and even ministers, are turning into “Captain Hindsight” themselves.

There seems to have been a bit of an epidemic of retrospective wisdom in recent days. The governor of the Bank, Andrew Bailey, and his colleagues, listening to the half-baked musings of the Treasury committee, were right to stand their ground and defend themselves. It’s true that inflation is around four times the official target of 2 per cent, but that is not the Bank’s fault. Even to the extent that it might be, it is down to the pressure on the Bank, from the government and the people, to prevent a depression.

Inflation can arise from the negligence and complacency of central banks, and indeed governments. It can also, as now, spring from external and unforeseen shocks. Post-Covid supply issues, and the spike in commodity, food and energy prices, both before and after the Russian invasion of Ukraine, have hit the whole of the world’s economy with a shock.

The surprising thing is that the British situation, uniquely hampered by Brexit and a chaotic government, is more or less in line with those of other large economies. Whether that continues is down to the skill of the Bank in preventing inflationary assumptions and expectations from becoming embedded and normalised, especially in relation to pay rises. It is not obvious that this would be done better by ministers with an eye on the next election.

It would have been unthinkable to start tightening monetary policy at the point when doing so would have been most effective. Raising interest rates, along with other such measures, takes many months to make any impression on the real economy. If the Bank was ever to have had a chance of keeping inflation close to 2 per cent now, it would have had to begin toughening its policies around the start of 2021, during another intense outbreak of Covid. To say the least, the future back then was unusually uncertain.

The danger, right from the beginning of the pandemic, was that the public health crisis would turn into an economic crisis, and indeed a slump. The government, its backbenchers, the opposition parties, business leaders and economists around the world were united in their determination to support companies, boost economic activity, and avoid a depression. That meant huge borrowing, record low (near zero) interest rates, and the creation of money via quantitative easing on an unprecedented scale. Furthermore, the expansion of the Bank’s balance sheet had to be, and was, approved by the chancellor, Rishi Sunak. The national debt also expanded to levels not seen since the years that followed the Second World War.

Inflation, therefore, was inevitable, but it was also the desired political outcome, given that no politician was calling for substantial hikes in interest rates as the economy was emerging, stunned, from the worst (so far) of Covid, beset by a labour shortfall in the transportation sector (and more broadly) along with a shortage of semiconductors. The combined and continuing effects of Brexit, with EU workers leaving and not being replaced, and long-term illness through Covid have conspired to create some severe staff shortages in areas such as hospitality, haulage and social care. In the UK, those particularly acute shortages in certain skills may have helped to ignite the early flames of a wage-price spiral – like a firelighter acting as a catalyst to accelerate the spread of a merely smouldering fire.

In crude terms, inflation is the way that the country will pay for Covid and Brexit, with those able to protect their incomes coming out better than those with fixed incomes and weak bargaining power, who will experience a sharp decline in their real incomes and living standards. As usual with inflation, there will be an arbitrary process of income and wealth redistribution.

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The bigger truth about the current inflation surge is that it is unusual in being primarily, and initially, about a supply-side shock – caused by the shortages of goods and workers – rather than a sudden increase in demand. Or, to put it more simply, there are no gas fields under the Bank of England’s imposing headquarters in Threadneedle Street. Nor does Mr Bailey have a secret supply of semiconductors in his basement.

In such circumstances, the Bank can do little about the “first round” of inflation. It can do more to depress business and consumer confidence, by raising rates to choke off spending and investment, but that will inevitably bring economic pain and political damage – just as the next election approaches. Operationally independent central banks are supposed to take these kinds of unpopular decisions, and the voters won’t like them.

No wonder some Tory MPs would like to grab the controls from Mr Bailey and give them to Boris Johnson. If that ever happened, the prime minister would engineer a pre-election boom, and 10 per cent inflation would be the beginning, not the end, of this national nightmare.