Inflation anxieties

Inflation may seem an unlikely concern for a chancellor contemplating a Budget in the midst of an economic shutdown. But there is growing anxiety among some economists (though by no means all) that the policies needed to shore up businesses during the pandemic will have long lasting consequences for prices. There are even fears that, as the lockdown is eased and consumer spending is released, the economy will overheat.

There seems little prospect of a return to the hyperinflation of the 1970s. But the fiscal and monetary stimulus programmes followed here and elsewhere in the world could be storing up trouble for the future. The response is largely out of the Chancellor’s hands as monetary policy has been the responsibility of the Bank of England since 1997. The Bank’s committee will make the decision on whether to raise interest rates to stifle inflationary pressures.

However, the consequences of doing so will be acutely political because asset prices are so vulnerable to an increase in borrowing costs. The markets have recently taken fright at this prospect, though have stabilised in recent days. Energy companies, mining stocks and property firms were the worst-performing sectors in London as they would be hit hard if central bankers started moving away from ultra-low interest rates and tightened policy to fight inflation. Andy Haldane, the Bank’s chief economist, warned recently that an “inflationary tiger” may have been released.

In the near term, Rishi Sunak has little to worry about, even if there is an explosion in pent-up demand when the brakes come off. But, as the next general election approaches, the last thing ministers will want is a rise in borrowing costs.