The British disease is back and no cure is in sight

Like in the 1970s, the great inflation tsunami is likely to hit the UK far harder than our economic rivals

When in a dark place, people don’t want to hear that it is all about to get darker still; they want hope and optimism. That’s what Boris Johnson specialises in. The Prime Minister is the living embodiment of the old stock market saying that it is better to travel hopefully than to arrive.

The problem faced by the ever-sunny Boris is that the destination is already looming into sight – and it doesn’t look good.

In the clinically calculated world of financial markets, the expectation is that inflation, as measured by the Retail Price Index, will hit 7 per cent by next April – a level not seen since the late 1980s. The disease that dogged the UK economy through much of the previous two decades – high inflation – shows unnerving signs of returning.

Ministers these days prefer to set their watch by the slightly less alarming Consumer Price Index, but even this is rising fast. RPI, moreover, is still the measure used to determine rail fares, interest on student loans, the coupon on inflation-linked government debt, and a wide range of similarly linked government contracts.

The potentially calamitous impact of rising inflation on the public finances is unfortunately just the half of it. Higher national insurance, another £400 a year on the average gas bill, rising interest rates, the cut in Universal Credit – all these things are set to eat deep into disposable incomes. Far from enjoying the fruits of Boris’s new model economy, people are about to feel some decidedly disagreeable side effects.

The high-wage, high-skill, highproductivity economy he promises is all very well; strangely, that’s what all governments aspire to. But even he must know the chances of it coming to the rescue in any immediate future, or even in the three years left before he once again faces the voters, are precisely zero. Wages in those sectors where labour shortages are particularly acute are admittedly rising fast. But on average, they are already struggling to keep pace with the upward march in prices. For the moment, it looks politically astute to blame business for supply shortages. In theory at least, we live in a free market, capitalist economy; if bosses need to pay their workers more to serve their customers, that’s what they must do. There is no excuse for current failings.

But if those higher costs lead merely to higher prices, it becomes a zero sum game. Businesses that struggle to pass on the extra costs might, moreover, simply choose to produce less, making the country even more reliant on imports. So much for rebuilding economic resilience.

It may be clever politics, but it is not clever economics. For it to be coming from a notionally Conservative government makes it all the odder. Higher wages leading inevitably to higher productivity? This could be straight out of a speech by Labour’s “corduroy Communist cosmonaut” Jeremy Corbyn.

Again in theory, we are today protected from the ravages of inflation by an independent Bank of England mandated to keep the lid on rising prices. Andrew Bailey, the Bank’s governor, insists that he will not shrink from his duty.

But an ugly one it is too, for any significant increase in the cost of money would plunge our ultra-low interest rate, debt-addicted economy deep into recession. Today’s record levels of job vacancies would vanish as quickly as they arrived. Small wonder that the Bank is so determined to regard current inflationary pressures as “transitory”, and therefore no justification for action. The Prime Minister can only hope Bailey is right. For their part, markets are ever less convinced; Bank of England credibility is hanging by a thread.

Periods of elevated inflation tend to be global in nature, but almost invariably in the post-war period have been worse here in Britain than in almost any other advanced economy. Currency devaluation in combination with overmighty unions help explain why that was the case back in the 1970s. All countries were badly affected by the oil price shocks of those years, yet nowhere more so than here in Britain.

The Thatcher purge, followed by the straitjacket of European Exchange Rate Mechanism membership and then the inflation targeting of an independent Bank of England seemed eventually to cure the disease. But whether this was a permanent remedy is beginning to look open to question.

Over the past two decades, globalisation and free movement of labour were arguably rather bigger factors in keeping inflation low than the Bank of England; their disinflationary effects have been a powerful driver of today’s high debt, low-interest rate environment.

Putting them into reverse, and thereby curing Britain of its supposed addiction to “mainlining” cheap foreign labour, is almost bound to come at the cost of higher prices. In his party conference speech, Mr Johnson suggested that only he had “the guts” to bring about this transformation – just as well, because he’s going to need more than just guts to weather the fast approaching tsunami of economic challenges.

It’s good to be optimistic; but a Pollyanna in an unforgiving world, not so much.