Britain’s inflation at crisis 40-year highs involves Johnson and the BOE

ryanniesMay 18, 2022

Bloomberg News

Philip Aldrick

Philip Aldrick

(Bloomberg) —

Britain’s worst inflation rate in 40 years is rapidly becoming a crisis for both Prime Minister Boris Johnson’s government and the Bank of England.

Central banks are in a storm after consumer prices soared 9% in the year to April. The Cabinet Minister, economist, and even the former BOE boss complain that Governor Andrew Bailey is too late to act and fails his job to keep inflation at 2%.

That point may mean distracting from the growing pressure on the Johnson administration to protect voters from the greatest pressures on their standard of living in their memory. Previously, Finance Minister Rishi Sunak had aimed to bail out workers, but Labor opposition said support should be extended to pensioners and those with benefits.

In a YouGov Plc poll released Tuesday, 72% of people surveyed believe the government isn’t doing well, and three-quarters think it’s not doing well with inflation. More than half of those who voted for the Conservative Party in 2019 made a mistake in the government.

Bailey did not solve the problem this week, admitting that he felt “powerless” in the face of global price pressures and warning that food costs had skyrocketed “apocalyptic”. He said he was “running out of jockeys” after a pandemic, a war in Ukraine, and a recent price shock.

Even former BOE officials are weighting. Andy Haldan, who warned of the “tiger” of inflation until he resigned as chief economist in August, said the BOE should have acted earlier. Mervyn King, governor of the financial crisis 10 years ago, told LBC Radio on Tuesday that “officials around the world, including us, have made serious mistakes by not acting too quickly.” rice field.

It showed a rare violation of the unwritten code that past governors did not criticize their successors. Even more surprising is the depth of criticism, which King called last year’s amount of quantitative easing to mitigate mistakes for detailed reasons.

“There was too much money chasing too few items,” King said. Bailey is wrong to feel helpless, he added. “The second mistake was the belief that we couldn’t do much about the high prices of energy and food.”

King argued that the Bank of England should aggressively raise interest rates as import prices determine future wage settlements. With more jobs than the unemployed, the employment market is tighter than ever, creating ideal conditions for a wage spiral.

“The idea that a 1% interest rate has a big impact on that inflation rate when wages are rising between 5% and 7% is really very strange,” King said.

In effect, he was telling the BOE to promote unemployment. And that is at the heart of the horrifying dilemma that the BOE faces. Get people out of work now to prevent wage price spirals, or go easy and risk a long-term stagnation.

It is clear that the BOE’s mission should raise interest rates, even if doing so poses a risk of recession. What makes the crisis very tricky and very hostile to politics is the fact that the solution from the BOE’s point of view is very different from what voters and politicians want.

From the BOE perspective, inflation is a technical problem that can be addressed with a technical response. In other words, interest rates will rise, rewinding the huge inventories of government bonds acquired by central banks.

From the perspective of households and politicians, it is a crisis of human living costs that can only be addressed by government distributions, potentially inflationary distributions. Financial and political incentives work beyond purpose.

When politicians blame the BOE for failing to control inflation, they may want to divert attention from their own shortcomings, but they actually claim unemployment. Of course, they never use those terms, leaving responsibility for both the inflation shock and the potential for unemployment due to the BOE. It’s neither the fairest nor the smartest approach, but it’s not hard to understand why the minister is looking for a scapegoat.

Tensions are only increasing as the crisis worsens. The input price, which is the cost borne by producers, is rising at an annual rate of 18.6%, which is a record high, and as this month’s BOE survey showed, companies are taking over. Factory gate prices, the prices paid by retailers, have risen at the fastest rate since 2008. In October, energy prices will skyrocket again. The Bank of England predicts that the inflation rate will peak at 10.2%. It’s starting to look optimistic.

With warnings that poverty levels could reach one million since the overwhelming sequence of steps in the Spring statement, the government is doing more for the poorest households already experiencing inflation of 10.2%. I have been under constant pressure to do. Estimate.

According to The Times, Snacks plans to subsidize low-income households as much as £ 1 billion through warm home discounts. The paradox is that the more the BOE responds to the technological inflation shock by raising interest rates, the worse the cost of living crisis will be in the short term. Jobs will be lost and debt will be difficult to repay.

As King said, the difficult truth is that “people are sticking to this.” The Bank of England can only increase borrowing costs to prevent inflation from being embedded. The government can only redirect wealth either by transferring through today’s tax system, or by borrowing and the costs left to tomorrow’s taxpayers.

Bloomberg.com