High price to pay

Andrew Bailey has no one to blame for this inflation mess but himself

It could have been pulled from a TUC press release. Or the notes of a junior lecturer at a minor university. Or one of the few remaining Corbynistas. There are plenty of people who might put all the blame for rising prices on greedy companies, heartless bosses, and a handful of tax-dodging tycoons. But the Governor of the Bank of England?

According to Andrew Bailey, companies pushing up their prices too aggressively is the major problem facing Britain’s economy.

The Bank blaming businesses for prices running out of control is as crass as it is absurd. This is the body whose mandate is to keep inflation close to 2pc per year.

The Bank’s Monetary Policy Committee cut interest rates to three-century lows in 2007, and in the intervening period has printed money as though it would never have any consequences. During his short tenure, Bailey has developed an increasingly embarrassing habit of blaming everyone else for the cost of living crisis. But the undeniable truth is that inflation is largely the fault of Bailey, his predecessors and his colleagues at the Bank – and it is time he was big enough to admit it.

It was one of the more bizarre interventions any Governor of the Bank has made in recent years. In an interview with the BBC, the day after pushing interest rates up to a 14-year high, he said: “I would say to people who are setting prices – if we get inflation embedded, interest rates will have to go up further and higher inflation really benefits nobody.”

Well, gosh. If companies keep on raising prices, especially in line with their costs, then we will continue in this cycle and never get the problem under control. It is the kind of insight that might get you a “4” in GCSE Economics. From the Governor of the Bank of England, we might have hoped for something a little more insightful. Bailey is attempting to explain this crisis as merely the result of “greedflation”, a thesis popular with the left, which tries to pin inflation on a handful of huge corporations increasing their profit margins to exploit customers who don’t have anywhere else to go.

Even if he is not bright enough to realise it, Bailey is opening the door to price controls. In fact, some Left-wing activists have already asked why, if we have price controls for energy, we don’t for food. The answer, of course, is that we should scrap them for the former and begin to unwind two decades of intervention in energy markets that has left us incapable of responding to supply shocks. If we continue along the current path, however, very quickly we will be right back in the mess we were in during the 1970s, with the state intervening in every corner of the economy until the crumbling system collapses.

Bailey is far too quick to blame everyone else for inflation. Last year, he argued that workers demanding wage rises that matched or even outstripped inflation would simply make the crisis worse. Employees are well within their rights to try to get the best deal possible.

He has insisted that the war in Ukraine, and the spike in energy and food costs, played a big part. Yet oil now costs less than before Russia’s troops moved across the border, and so do key commodities such as wheat.

His statements simply don’t stack up. Given that corporations are presumably just as greedy in say the US, Japan, or Switzerland, you would expect their inflation rates to be just as bad as ours. And yet, while in the UK last month it rose back up to an eye-watering 10.4pc, in the US it fell to 6.01pc, in Japan it is running at 4.3pc, and in Switzerland at 3.5pc.

How puzzling that Apple, Toyota and Nestlé don’t push their prices up and stoke inflation, but Tesco, Next and Unilever do. And how strange there was no mention of the Government’s fiscal policy, or the increase in public sector wages, to accompany the Governor’s business-bashing. Bailey’s claims yesterday are clearly nonsense. There is no great mystery about the rise in inflation. It is true that external factors, including the war in Ukraine, and a spike in wages, may have provided the spark.

But the bonfire was built by the Bank itself, with much of the kindling laid before Bailey assumed his role in 2020. It slashed interest rates after the financial crisis and started printing money on an unprecedented scale.

That might have been a reasonable emergency measure, but the Bank then kept monetary policy incredibly loose for a decade longer than it needed to.

During the pandemic, the Bank cut rates even further, and printed even more cash, even though logically with so much less production we needed less money sloshing through the system instead of more.

And then, when the first signs of inflation started to emerge, these were dismissed as merely “transitory” even though it was fast becoming apparent that something far more sinister was happening.

It is time Bailey was mature enough to own up to that. He could legitimately shift some of the blame to his predecessor, Mark Carney, or to the chancellors and prime ministers who mandated lockdowns, and spent far too lavishly.

But inflation, as Milton Friedman observed, is always and everywhere a monetary phenomenon. That is Bailey’s responsibility, and no one else’s – and his attempts to shift the blame elsewhere are an embarrassment both to himself and the institution he leads.