Nothing undermines the stability of our economy, our communities and our families more than inflation. It hits the poorest in society the hardest and constitutes a moral as well as an economic danger. Gaining control is essential if the government is to achieve its economic goals, including the race to the top, and if the Conservatives are to win the next election.
The global economy has suffered a negative supply shock due to the pandemic. Falling production of a range of commodities has been followed by rising prices as growing demand during the recovery period has outstripped supply. This should be corrected by the market over time, but the huge price increase in some sectors, especially oil and gas, has led to a spike in inflation around the world.
But that’s not the whole story. In Japan, a country that imports all of its fossil fuels, the latest inflation figure is 1.2%. In China, it is 2.1%. The EU is keen to talk about a Europe-wide problem, but while inflation has climbed to 7.5% in the euro zone, it is 2.5% in Switzerland. In the UK, inflation has exceeded 7% and in the US it is 8.3% and continues to rise.
Something other than energy prices must be behind this. We are indeed confronted with not one but two inflationary surges. That of rising commodity prices, which affects us all, and that of monetary inflation that afflicts countries whose central banks have allowed persistent increases in the quantity of money relative to existing production.
It’s not like there weren’t any warnings. In June 2020, the Institute of Economic Affairs published Inflation: The Next Threat? by Juan Castañeda and Tim Congdon. They pointed out that although governments have periodically overspent and encouraged deficits to increase demand, this policy “will be inflationary if the central bank adopts a monetary policy that adapts too easily to the needs of the government… when the priority of the central bank is to finance the budget deficit, and not to control inflation or to achieve the macroeconomic policy objectives usually understood”.
Groupthink among central bankers reinforced the idea that they had stumbled upon monetary alchemy and that it was possible to increase the money supply, unrelated to output, without creating inflation. Perhaps they knew inflation would be inevitable, but felt they had to follow the instructions of their political masters to maintain high levels of employment. This, however, would only raise more questions about the so-called independence of central banks. In any case, this is a completely unacceptable position.
The government’s first duty is to protect its citizens from the kind of external threats that we see afflicting Ukraine today. But there are other threats against which we have a right to be protected – the depreciation of our currency, the erosion of our incomes and the devaluation of our savings. According to conservative orthodoxy, governments are wrong to indulge in structural profligacy, passing on ever-increasing debts to future generations. It is also the duty of central banks to preserve the value of our money and our savings.
The Bank of England persisted beyond any rational interpretation of the data to tell us that inflation “was transitory” and consistently underestimated the level of threat. It would be desirable for the Commons Treasury Committee to investigate why the bank did so. It would also be reasonable for the government to think about the orientations that could be given to the bank to report on monetary stability. But it is essential that the bank, which arrived late to the party, does not now overreact and tighten its policy too quickly. Monetary growth has moderated to the point that government inflation targets are expected to be met, albeit with some lag. Excessive tightening could aggravate the already high risk of recession.
As Milton Friedman said, “Inflation is taxation without legislation.” We’ve had enough of both already. We don’t need more.