The Bank of England this week joined the ranks of the “enemies of the people”. Damned for the governor’s gloomy but accurate assessment that UK consumers face an “apocalyptic” spike in food prices, the Bank found itself on the front pages of the populist press. The Old Lady of Threadneedle Street stood accused of being “asleep at the wheel” as prices soared.
But hiking interest rates would not have stopped escalating costs. The Bank’s governor, Andrew Bailey, was right when he said that inflation – which reached a 40-year high of 9% – had been driven by international events. Covid supply chain disruptions, the Russian invasion of Ukraine and Brexit are all beyond his control. Higher interest rates are not going to produce more oil or more wheat and bring down the prices of key commodities.
The Bank did deliver a fourth successive increase this month to take its lending rate to 1%. Mr Bailey could argue that if he didn’t push up interest rates when other countries were raising theirs, the pound would depreciate – with potentially inflationary consequences.
Workers have suffered two decades of stagnant pay. Inflation is more than double the average pay rise. Many workers are refusing to return to jobs at poor pay. So, it appears, the only way of filling vacancies is by making Britons desperate. That would explain why, despite all the crocodile tears about inflation harming ordinary people, ministers and the Bank are determined to stop wages rising.
Labour must challenge this dreary orthodoxy. Its call for an emergency budget is the right one to make because only the government can spend the money to help people deal with the cost of living crisis – and signal a better future for workers. Ministers have been briefing that they are considering a “warm home discount” on energy bills for the poorest 3 million, and a 1p cut to the basic income tax rate, brought forward from next year. The former is a small step but a welcome one. The latter is a sop to richer voters as 80% of its benefit goes to the top half of earners.
Inflation is not going anywhere soon – and it should be a reckoning for a free market ideology that has come to dominate our political life. If the Conservatives can argue that taxes must come down to deal with inflation, even at the cost of a higher deficit, then surely Labour can argue that public spending could be increased for the same reason.
Higher benefits are needed so that the poorest people don’t have to choose between heating and eating. Governments ought to be able to cap housing and loan costs so that ordinary people don’t end up borrowing more just to survive. If oil and gas costs are going to remain high, then surely it is time to implement, in a substantial way, policies to transition to a less energy intensive future – such as free public transport and subsidies for green home renovations.
The immediate causes of inflation should not mask the predatory factor of commodity speculation. Wall Street banks are regularly fined for manipulating prices. It is worth recalling that there was plenty of grain to feed the world in February. But provisioning food has turned, to paraphrase John Maynard Keynes, into a byproduct of the activities of a casino, with predictably calamitous results.
It is astounding that the Bank of England does not understand these markets – surely a prerequisite for regulating them. The prevailing ideology of the last 40 years has blinded the public to alternatives by deliberately confining the boundaries of public debate. Only by seeing the world as it really is can voters change it.