The Bank is not ‘helpless’ to stop an inflationary crisis

Andrew Bailey and his officials can learn from their own mistakes and save us from further pain

Appearance and reality rarely converge when public figures give evidence to Westminster select committees and Andrew Bailey’s performance earlier this week was no exception. Many will consider the Bank of England Governor’s suggestion that workers “think and reflect” before asking for pay rises a particular low point, not least given the opprobrium he attracted after saying something similar back in February – a time when he was unable to recall his own salary.

Flanked by deputy governor Dave Ramsden and two other economists on the Monetary Policy Committee, Bailey set alarm bells ringing on Monday with the admission that he had no control over at least 80pc of the underlying causes of inflation. Like the cast of Deep Impact as the comet hurtles towards Earth, he indicated he can only sit back and observe as war and Chinese shutdowns send inflation soaring into the double digits.

The Office for National Statistics is today expected to confirm that inflation has passed 8pc, or even 9pc, while the Bank itself recently said it could peak at 10.25pc by the end of 2022. Pointing to the black swan events of recent years, Bailey claimed that inflation is largely a global phenomenon. He is right insofar as inflation in the euro area is 7.5pc and in the US 8.3pc. Pressures from global supply chain bottlenecks, due to strong global demand for goods and inelastic supply, have intensified significantly. The Russia-ukraine war has disrupted Black Sea exports of crucial commodities from a region that had been producing more than a quarter of the world’s wheat.

Then again, Swiss inflation was 2.5pc in April. Its interest rates are very low but, more importantly, money growth has been kept under control. This has supported the Swiss franc and kept imported inflation down. In contrast, over the course of the pandemic the Bank of England allowed itself to get wrapped into the mood of the time.

It was Everett Mckinley Dirksen, a former US senator, who quipped “a billion here, a billion there, and pretty soon you’re talking real money” – but his figures have been eclipsed by the scale of Covid spending. At one point, the Government was borrowing around £37m every single hour. To make up for the shortfall between revenues (after tax receipts fell) and spending, the Bank printed money like there was no tomorrow.

Growth in the money supply reached a 30-year high in April 2021 – four months after chief economist Andy Haldane issued warnings over keeping a “laser focus” on inflation expectations as the economic crisis eased. And we are now paying the inflation price of this rapid rise in broad money, leading some to ponder: if central banks so readily cave into ministerial demands, why call them “independent”?

The Bank might be short on solutions, but Bailey’s advice to workers who would like to see their wages keep pace with prices is both ethically and economically questionable. It is a variation on the idea that there is no inflation in a graveyard. If we stopped paying people and they starved to death, that would deal with the problem pretty quickly.

It is true that the UK labour market remained remarkably resilient during the pandemic. Yesterday’s employment data showed the jobless rate fell to its lowest level since 1974 between January and March this year. There were fewer unemployed people than vacancies as job openings hit a record 1.3m. In what appears to be a desperate effort to attract and retain staff, some businesses are offering unlimited holiday, others Friday afternoons off during the summer.

But the true picture is more mixed. While average total pay growth over the first quarter rose to 7pc, this was driven by bonuses – which most in work do not receive. The growth in regular pay was a more subdued 4.2pc, far below the current rate of inflation. Low-income households will be struggling to afford food and energy bills: they should ask for whatever salary they think they’re worth. As the Governor will know, a one-off increase in the price level, and a one-off increase in wages, is not inflationary. What matters is what happens next.

If wages rise at the same pace next year, based on expectations that inflation in the double digits is here to stay, then we will find ourselves in the kind of wage-price inflationary spiral Bailey fears.

To that end, his insistence that the Bank cannot control the price of labour is disingenuous: if it can drive down expectations, a corresponding adjustment in wages will follow. Few workers demand – and fewer businesses offer – 8pc hikes if they’re anticipating inflation will remain steady in the low single digits.

Rather than fixate on particular prices – energy, food, labour – the Bank should worry about the credibility it will need to restore if it is to succeed in managing our inflation expectations. While inflation currently sits five percentage points above the Bank’s target of 2pc, the MPC raised interest rates by just a quarter of a point, to 1pc, at its latest vote. What’s more, it kicked the reduction in the size of its asset purchase programme into the long grass and suggested active “quantitative tightening” be postponed until the autumn.

Bailey is right that there is little the MPC can do to control inflation in the short term, but bolder steps would have reduced the risk that inflation remains higher for longer.

Against a backdrop of ongoing crises, parlous public finances, a progressive Left who espouse modern monetary theory and a public that now believes it really can get something for nothing, it won’t be easy. But the decisions made now will determine how many “apocalyptic” warnings the Governor has to utter in future.