The Daily Telegraph

In their drive to control inflation, central bankers risk the economy

Policymake­rs are behaving like the Berlin zookeepers who wanted to kill Knut the polar bear


Right, which would you prefer: the good news or the bad news? It’s probably best to start by looking on the bright side. It will take less time.

The UK’S annual rate of consumer price inflation fell to 9.9pc in August, down from 10.1pc in July, according to the Office for National Statistics. This was below expectatio­ns. Economists polled by Reuters had forecast the inflation rate would rise to 10.2pc.

The slight drop was mostly the result of a fall in petrol prices, which are down by 7pc over the last month and mean you no longer have to sell a kidney to fill up your car. Likewise in the US, the consumer prices index fell to 8.3pc last month compared with August last year, down from an annual rate of 8.5pc recorded in July and 9.1pc in June.

So is it time to declare “mission accomplish­ed” in the fight against inflation? Have price rises peaked? Not quite.

The glass-half-empty news is that the prices of lots of things are still spiking. Inflation in food and nonalcohol­ic drinks in the UK is now 13.1pc, with milk, cheese and eggs leading the charge. This is particular­ly worrying as it is likely to hit poorer households hardest.

The fall in the oil price suggests that global energy markets are starting to adjust to the reduction in supply caused by the West’s sanctions on Russia. But it’s only early September; energy bills could easily start rising again as we head into the colder weather.

Even if we are approachin­g peak inflation (and that’s a big “if ”) there are growing worries that it will stay well above central bank targets for much longer than previously hoped. The cost of living squeeze may relax a little but it will have us all in its vice-like grip for some time to come.

Underlying inflation measures in the US have hit multi-decade highs. The UK, like the US, is also suffering from rising services inflation, which was up to 5.9pc in August compared with 5.7pc the month before. There are signs that the kind of wage-price spiral, which is most feared by central bankers because it feeds on itself to form a vicious cycle, may be taking hold.

“Inflation has not peaked yet,” says Paul Dales, the chief UK economist at Capital Economics. “We think CPI inflation will rise to 11pc later this year and that the tight labour market will keep underlying inflationa­ry pressures strong until early next year. As a result, the Bank of England will have to continue turning the screws.”

Investors are worried that we are getting to the point where central bankers may feel they have to tip their economies into a recession in order to tame runaway price rises. Hopes of a so-called “soft landing” for the global economy are beginning to feel like wishful thinking.

Markets took fright on Tuesday. The three main market indices in the

‘Central bankers must choose between death by a thousand price rises or massive rate rises’

US suffered their worst day since June 2020, with the Dow Jones Industrial Average, S&P 500 and Nasdaq following by 3.9pc, 4.4pc, and 5.2pc respective­ly.

Mark Cabana, the global head of US rates strategy at Bank of America, spoke for many in the market when he expressed his worries that the Fed is going to overcorrec­t: “We think that the Fed will try to stick to this higherfor-longer mantra. That’s probably going to result in a recession.”

Central bankers are in an unenviable position. They must choose between death by a thousand price rises or the electrosho­ck therapy of massive interest rate hikes. Which will be more debilitati­ng: disease or cure?

The bums seated in Threadneed­le Street will be squeakier than most. The Government’s plan to cap household energy bills at £2,500 may very well knock the top off peak inflation. But will it result in people having more money to spend on other items, thus pushing up prices in other categories?

And, if the Fed goes big with rate hikes that put turbo-thrusters on the value of the dollar, will the Bank have to follow suit just to protect the pound and keep a lid on the cost of imports? Are these even the right questions to be asking?

Danny Blanchflow­er, a former member of the Bank’s Monetary Policy Committee, has repeatedly pointed out an uncomforta­ble truth: recessions can hurt more than inflation. He recently wrote that “a one percentage point rise in the unemployme­nt rate … hurts at least five times more [in well-being terms] than a one percentage point rise in inflation”.

The investment firm Blackrock had estimated that quickly bringing inflation down to the Fed’s target would require a deep recession in the US with the economy contractin­g by 2pc and three million more workers being added to the dole queue. It suspects things would be even more dire in Europe.

To drive home the point, Blackstone likens the current dilemma faced by central bankers to that confronted by zookeepers who looked after Knut the polar bear after he was rejected by his mother shortly after being born at Berlin Zoo in 2006. Initially the cub was hand reared by bottle. But some argued it would be better for Knut to die than be raised by humans.

“To our mind, central bankers seem to have a bit of a ‘let the bear die’ mentality right now,” say Jean Boivin and Alex Brazier of the Blackrock Investment Institute. Policymake­rs seem unwilling to acknowledg­e that raising interest rates to reduce inflation will hurt growth.

It is undoubtedl­y uncomforta­ble living with constantly ratcheting price rises. But, in our headlong rush to solve one problem it is certainly worth asking: are we absolutely sure that the alternativ­e isn’t worse?

A media frenzy and widespread protests ultimately saved Knut’s life. It’s not clear whether the economy will get a similar reprieve.

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