The Bank of England has inflation questions to answer

Countries whose central banks allowed the money supply to rise too rapidly are facing the worst price rises now

Nothing undermines the stability of our economy, communities, and families more than inflation. It hits the poorest in society hardest and is a moral, as well as an economic, hazard. Getting on top of it is vital if the Government is to achieve its economic objectives, including levelling-up, and if the Conservatives are to win the next election.

The global economy suffered a negative supply shock because of the pandemic. The fall in output across a range of commodities has been followed by an increase in prices as rising demand in the recovery period has outstripped supply. This is likely to be corrected by the market over time but the huge increase in prices in some sectors, notably oil and gas, has resulted in a surge in inflation worldwide.

But this is not the whole story. In Japan, a country that imports all its fossil fuels, the latest inflation figure is 1.2 per cent. In China, it is 2.1 per cent. The EU is keen to talk about a Europewide problem yet, while inflation has surged to 7.5 per cent in the eurozone, it is 2.5 per cent in Switzerland. In the UK inflation has passed 7 per cent and in the US it is 8.3 per cent and rising.

Something, other than energy prices, must be behind this. We are facing two inflationary surges: commodity price rises, which affect us all, and monetary inflation, which afflicts countries whose central banks have allowed persistent increases in the amount of money relative to existing output.

It’s not as if there were not warnings. In June 2020, the Institute for Economic Affairs published Inflation: the next threat? by Juan Castañeda and Tim Congdon. They pointed out that, while governments have periodically overspent and encouraged deficits to increase demand, this policy “will be inflationary if the central bank opts for a monetary policy that accommodates too readily the needs of the government ... when the central bank’s priority is to finance the budget deficit, not to keep inflation under control or to attain the usually understood objectives of macroeconomic policy.”

Groupthink among central bankers reinforced the idea they had stumbled upon monetary alchemy and it was possible to expand the money supply, unrelated to output, without creating inflation. Perhaps they knew inflation would be inevitable but felt they needed to follow the instructions of their political masters to maintain high levels of employment. That would, however, simply raise more questions about the so-called independence of the central banks. Either way, it is a wholly unacceptable position.

The first duty of government is the protection of its citizens from the sort of external threats that we see in Ukraine today. But there are other threats we have a right to be protected from – the debasement of our currency, the erosion of our earnings and the devaluation of our savings. It is Conservative orthodoxy that it is wrong for governments to engage in structural profligacy, passing ever larger amounts of debt onto future generations. It is also the duty of central banks to safeguard 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 transient” and has consistently underestimated the level of the threat. It would be desirable for the Commons Treasury committee to investigate why the bank has done so. It would also be reasonable for the Government to think about what guidance might be given to the bank to report on monetary stability. But it is essential that the bank, having come late to the party, does not now overreact and tighten policy too quickly. Monetary growth has moderated to the extent that the Government’s inflation targets should be met, albeit after a lag. Excessive tightening could deepen the already high chance of recession.

As Milton Friedman said: “Inflation is taxation without legislation.” We have had enough of both already. We do not need more.