The inflation shock will become a political one

Surging prices are coming for Biden and Boris, who are alarmingly complacent about this threat

If it’s not one problem, it is another. Having closed down the economy to deal with the pandemic, and seen the public finances collapse accordingly, policymakers across the globe find themselves confronted by a much older, and almost forgotten, enemy. Inflation is back, and shows few signs of wanting to go away.

In the US, consumer price inflation surged last month to 6.2 per cent, its fastest annual increase in more than 30 years. In China, factory gate inflation is at a 26-year high, while here in the UK the Bank of England expects CPI inflation to be at 5 per cent plus by the second quarter of next year.

As governments have repeatedly found to their cost, high inflation is not just an economic scourge; it’s a political problem, too. When prices go up, it squeezes living standards, and whether it is their fault or not, it is the politicians who will get the blame.

With the midterms just a year away, alarm bells are already ringing in the

Biden White House. Even sleepy Joe has heard them. “Inflation hurts Americans’ pocketbooks, and reversing this trend is a top priority for me,” he said after this week’s shock inflation numbers.

“Top priority”? Perhaps he should have thought about it earlier. It’s not as if he wasn’t warned. The economist Larry Summers, a former Clinton administration treasury secretary, has been banging on about it for months, as have many business leaders, Wall Street economists, Uncle Tom Cobley, Corporal Warner and all.

With the warning signs flashing red, Biden was instead focused on measures to get the economy going again after the ravages of the pandemic, with some record-breaking spending plans.

It is an article of faith at the White House that the mistake made by Barack Obama after the financial crisis was an insufficiently large fiscal stimulus. So Biden has been pushing for something much bigger.

Absurdly, he claims that the spending will actually help with the problem of inflation. The $1.2 trillion infrastructure bill will reduce bottlenecks and make goods more available and less costly, he insists. As for the $1.5 trillion Build Back Better social programme, that will also help by reducing the cost of child care and medical expenses. Believe it if you will. Much more likely is that they will only further fan the inflationary flames.

The immediate cause of today’s spike in prices may be the transitory problem of constrained supply as demand comes surging back after the deprivations of lockdown, but you don’t have to look far to see a more enduring threat – too much easy money and too much government spending.

Over the past two years, we have seen record peacetime levels of deficit spending, not just in the US but across the globe. This comes on top of a decade of unprecedented central bank money printing.

When in a hole, blame price gouging by unscrupulous capitalists. With wearying predictability, that’s what the White House has been doing. If the 1970s are anything to go by, the next stop will be price controls, which would make the problem even worse.

What happens in the US tends almost always to wash up on British shores a little while later. Inflation will soon be as much a burning political issue for Boris Johnson as it is for Biden. Time was when a little inflation could be seen as positively beneficial, at least from the Exchequer’s point of view, in that it would erode the value of public debt burdens.

That’s no longer the case. With a quarter of the UK national debt now indexed to inflation, and a further third owned by the Bank of England, debt servicing costs are these days much more heavily geared to short term movements in prices and interest rates than they used to be. Any enduring bout of inflation would enormously increase the Chancellor’s task in putting the public finances back on an even keel.

Nobody can say for sure, but that may be precisely what he is about to get. To add to the immediate pressures from energy costs and the like, there is good reason to suspect we are in the midst of a seminal change, marking the passage from a disinflationary to an inflationary age.

To judge by still extraordinarily low market interest rates, money managers don’t yet believe it, but just consider the following. First, the downward pressures on prices exerted by China and the rest of Asia are going into reverse. Wages are rising fast in these once low labour cost economies; ageing populations, meanwhile, imply their transformation from a high saving to a higher spending model, further reversing disinflationary forces.

At the same time, Western economies are trying to reduce their dependence on China and become more self-sufficient; in itself that will be inflationary. And finally there are the costs of going green, which will add to energy bills for decades to come.

Sleaze is supposedly the political issue of the moment. But the much more potent longer term threat to the Johnson Government is rising prices, rising taxes and the consequent squeeze on living standards. That’s one thing that even Teflon Boris won’t get away with.