Prove your mettle in the war against inflation, Mr Bailey
INFLATION casts an ever darker shadow over our society. Neither security nor prosperity are possible while it continues to exert its destructive influence, driving up the cost of living, degrading the currency and devaluing earnings.
In another sign of the seriousness of this menace, the British Retail Consortium reported yesterday that food prices in Britain are climbing at their fastest rate on record, up by 11.6 per cent this month, compared to a rise of 10.6 per cent in September. Basic items like milk, sugar and tea have now become more expensive, while the cost of fresh food has risen by 13.3 per cent year-on-year.
Such hikes worsen the burden already inflicted on millions of households by soaring energy bills and savage increases in charges for everything from petrol to public transport. At the same time, pay rates have generally failed to keep pace with inflation, feeding a mood of discontent across the public sector that is reflected in a rash of strikes. Even nurses are being balloted for industrial action.
Indeed there is a sense that Britain is sliding back to the grim days of the 1970s, when inflation peaked at 25 per cent in the middle of the decade and our country became known as the “sick man of Europe” because of the paralysing militancy of the trade unions.
In this climate of economic chaos, the public finances were so indebted that in 1976 the Labour Government had to seek a bailout from the International Monetary Fund, while the top rate of tax on the wealthy reached 98 per cent.
PUBLIC disillusion with the state’s failures led to Margaret Thatcher’s election in 1979. In her mission to restore economic management, she made the conquest of inflation her overriding goal. The battle required tough decisions, including interest rate rises, spending cuts and tax increases, but she was certain that there was no alternative. “Inflation is the parent of unemployment and the unseen robber of those who have saved,” she warned.
That lesson is as true today has it was when she came to power. In the face of accelerating price rises, there is no room for complacency or timidity. Inflation remains a prime threat to the social order and economic stability. That is why the Bank of England, which was given its independence in 1997, must now take firm action to bring back monetary control.
Its Governor Andrew Bailey has recently spoken of his determination to achieve this aim, promising that the return “of inflation to its two per cent target remains an absolute priority, no ifs, no buts.”
If the Bank is to live up to this defiant rhetoric, its Monetary Policy Committee should agree today to put up its interest rate by 75 basis points to three per cent. Such a move would not only be the eighth rise in a row but represent the biggest sustained rate increase in 33 years.
Even so, at three per cent, the Bank’s base rate would still be low by historic standards. Moreover, this step is vitally necessary, not least to convince the global financial system of the Bank’s credibility and sense of purpose after the shambles of the disastrous mini-Budget introduced last month by Liz Truss and Kwasi Kwarteng.
If the markets detect any sign of weakness or retreat, they could plunge into another round of volatility.
Yet there are siren voices urging Bailey and his team not to be too rigorous. These advocates of soft-minded caution argue that, with Rishi Sunak as Prime Minister and Jeremy Hunt as Chancellor, the introduction of tighter fiscal policy will serve as the prime weapon against inflation and thereby ease the pressure for a strong monetary approach.
But it would be the height of folly to be seduced by these claims. After the Covid pandemic and the energy price shock, the British economy is in such an indebted crisis that resolve must be shown on both the fiscal and monetary fronts.
ONE reason for our current rampant inflation is that Bailey and the Bank were too slow to recognise the dangers. Believing that the surge was “transitory”, they kept interest rates too low for too long and carried on printing money, a process dressed up in the term Quantitative Easing.
It used to be said that the Bank of England’s Governor could exert discipline on the markets simply “with a raised eyebrow” but Bailey, who took up his post in March 2020, has lacked so far the authority of his recent predecessors like Mervyn King and Eddie George.
Now he has the chance to assert himself, take command and build a new reputation by proving his mettle in the battle against inflation.
‘If the markets detect weakness they could plunge into volatility’