RUTH SUNDERLAND: Bank must not open Pandora’s Box of inflation

RUTH SUNDERLAND: Bank of England’s mission is to maintain monetary and financial stability – we cannot afford to open the Pandora’s Box of inflation

‘Inflation is thought of as a cruel, and maybe the cruellest, tax because it hits in a many-sectored way, in an unplanned way, and it hits the people on a fixed income hardest. 

‘And there’s a lot of evidence that it hits poorer people more than richer people, who have more ways to protect themselves.’ 

These are the words of the late Paul Volcker, the legendary chairman of the US Federal Reserve who has gone down in history for leading the war against inflation, the scourge of the US – and UK – economy from the mid-1960s to the early 1980s. 

On the rise: The Bank of England has until this week waved away the threat of a return to inflation by suggesting increases are transitory effects due to Covid

Few voices carry more weight on the subject than his. The social and economic damage caused in that period was so devastating that independent central bank policy in developed countries has for several decades been conducted with a view to preventing it ever happening again. 

The Bank of England’s inflation targeting regime has been in place now since the trauma of 1992 when the UK crashed out of the European Exchange Rate Mechanism and interest rates briefly rose to 15 per cent. 

Since then, rampant inflation has become little more than a bad memory from the 1970s like Glam Rock, the three-day week and the Winter of Discontent. 

The danger is that, since the volcano has been dormant for so long, the rumblings are not taken seriously enough now that it is threatening to erupt. 

The Bank of England has until this week waved away the threat of a return to inflation by suggesting increases are transitory effects due to Covid. It now admits the pressures are likely to be persistent. 

Admittedly, the Bank forecast of 4 per cent is still a long way off the 25 per cent rate in 1974 after the Yom Kippur War. But complacency would be a grave mistake. 

It is hard to stress enough the corrosive impact on the economy, the social fabric and people’s lives. 

The value of wages and savings are wiped out, making a mockery of the work ethic and robbing the thrifty. Punishing those who aspire to better themselves through hard work and prudence should be anathema to any Conservative government.

Pensioners, who normally have limited protection against inflation and no bargaining power in the wage market, can expect to be particularly hard hit. The breaking of the triple lock promise, meant to give them protection, is a poor omen. 

The policy response is higher interest rates. That would be ruinous for homebuyers who have taken on big mortgages in the conviction that low rates are a fact of life. 

Over-indebted companies would collapse. The folly of the reckless private equity deals on the UK stock market, also predicated on oodles of cheap debt, would be exposed. The Government’s vast borrowings would become even more expensive to service. 

The price of industrial goods such as steel would be pushed upwards. Energy prices, petrol and goods in shops are already rising, putting a squeeze on family finances. 

Inflation has in the past been a dog that didn’t bark. 

Plenty of experts expected it to rise after the financial crisis as a result of the huge QE money-printing programmes. That did not happen, though asset values did take off. But the so-called emergency measures have not been unwound and have expanded drastically to combat Covid, to the tune of another £450billion in the UK. 

The Bank of England’s stated mission is to promote the good of the people of the United Kingdom by maintaining monetary and financial stability. We cannot afford to open the Pandora’s Box of inflation. 

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