The Guardian has reported a speech by Bank of England chief economist Huw Pill, given in New York yesterday. In the speech, Pill said that the Bank still needed to raise interest rates as the threat of inflation had not gone away. As the Guardian notes:
Pill said that although natural gas prices had fallen, they remained significantly higher than historical levels, raising the threat of persistently higher inflation because businesses and households may push to offset these costs by demanding higher wages and prices.
“The longer that firms try to maintain real profit margins and employees try to maintain real wages at pre-energy price shock levels, the more likely it is that domestically-generated inflation will achieve its own self-sustaining momentum,” he said.
It is not just gas prices that have fallen, as I noted recently. Most raw material prices have, at least to the levels that they were at before the war in Ukraine. But that is not the issue for Pill. He has another quite separate agenda.
What Pill wants are two things. First, he wants to force those businesses that have not already increased their prices to reduce their profit margins. And he wants to force households to accept lower real incomes. In other words, he is seeking to crush the economic wellbeing of both.
The result will be twofold. The first consequence will be significant numbers of failing businesses as profits collapse. Rising unemployment inevitably follows.
And second, Pill wants to impose real misery on households.
What is more, just in case businesses and households will not voluntarily accept these demands he says he will use the power of the Bank to wholly unnecessarily increase interest rates to ensure that businesses really do fail by compounding their problems by increasing the borrowing costs, whilst simultaneously crushing the spending power of households who have to borrow (mainly younger households, with children) or those who rent (as rents follow borrowing costs) which tend to be lower income households.
Pill will, of course, say that this is what is required for the Bank to fulfil its mandate to keep inflation down - even though that is forecast anyway, and which fall now requires no change in the interest rate, unless it is a downward move.
I do not see things Pill's way. What I see is a brazen abuse of power to reinforce the wealth of a few at cost to most in society by an authority (the Bank of England) that is wholly out of control and which is using neoclassical economics, which has no foundation in economic reality, as a tool to oppress most in society to benefit the few who this policy will favour. Call it economic civil war, if you like.
And what I cannot find is anything in the Bank of England mandate that says it is allowed to oppress the country. Nor do I see anything that says it must create wholly unnecessary recessions. What is more, nothing says it must engineer an increase in inequality in the UK. Nor does it have the power to lay waste to the UK business community, or drive households into destitution. But that is what they are doing.
And then ask the question, why is it that the NHS and social services are under such stress? Could it be, at least in part, the result of the deliberate policy of the Bank of England to undermine security, incomes, safe housing, stable communities and secure childhoods in this country? Might their policy of deliberately creating anxiety at almost unprecedented levels be the course of much more than our economic malaise? I think so.
I strongly recommend that in this case we stop taking this Pill at face value and see what he really intends, which is economic devastation. A sane government would stop the out-of-control autocrats at the Bank of England. Ours just applauds them as they drive the country towards destitution.
We are living through an era of economic madness.
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Very little to add to this – it sums up matters perfectly.
Civil war – yes – definitely. My only contention is the word ‘madness’. From the outside-in maybe yes, but internally the BoE know what they are doing because you have set it all out. It’s deliberate and calculated.
It’s economic warfare and in plain sight. It’s oppression and it is cruelty.
So is Pill an ideologue or an idiot? Possibly the same question could be asked about BoE Governor Andrew Bailey.
And what is the governing structure of the Bank doing to check their actions and ensure Bank fulfills its remit of acting in the public good. This starts with the MPC, it does not end there.
https://www.bankofengland.co.uk/about/governance-and-funding
I completely agree with you on the fact that inflation will fall and that interest rate rises are a bad idea. Indeed, rate rises combined with the Austerity that is being impose by Government is truly a disaster. The BoE really needs to understand this.
However, I think that you load to much on to the passage that you reproduce from Huw Pill’s speech.
Our economy is not closed – we import substantial amounts of food and gas. If we have to expend more resources to obtain these things then we will have fewer resources left to use to create other things we want. In short, if essential imports cost more then we, in aggregate, will be poorer (other things being equal).
Whilst Food and Energy have declined from very high levels and, year-on-year, are unchanged they are still higher than pre-pandemic levels. Eg. Natural Gas in Europe which is still 3 times the price seen before the Pandemic and US Gasoline prices (NY Harbour delivery) are double pre-pandemic levels, US corn futures double pre-pandemic. It is not entirely bleak; US Henry Hub Gas is back very close to 2019 levels, US wheat futures are only up 10 or 20%.
So, when Huw Pill says that if everyone tries to maintain real profit margins and wages there will be inflation I do see his point….. although it is clear that he is not being entirely honest. As a statement, it is just a starting point but we need an analysis of scale and distribution.
We should not be thrown by scale. For example “NY Gasoline futures have doubled” sounds scary “NY gasoline futures are up 25 pence a litre” it is not. Also, the cost of the wheat in a loaf of bread is a small part of the overall cost. We should not be alarmed by big swings in commodity prices (that have always occurred).
But what is clear is that these price swings ARE allowing companies to push through prices rises. Profit margins are being maintained (particularly large companies that have pricing power in their sector) so owners of capital are maintaining real incomes. Workers are seeing real terms pay cuts.
So, when Huw Pill wants to take aim at someone it needs to be large corporation profit margins.
Your points are relevant
But Pill cannot extrapolate from them to what he says: that is not possible
That is my point
… and it is a fair point.
Nor can you extrapolate from the recent reduction in raw material prices to the still elevated level of 12 months ago to conclude that inflation will fall exactly in line with ONS forecasts.
As John says : the cost of a commodity is a small part of the overall cost of items in the inflation basket.
Except when it was the only reading why the price rose
Which it wasn’t.
We can look at the breakdown of the basket into the major groupings. Easy to tease out that inflation since a year ago is not exclusively about commodity prices.
So how do you take energy and raw materials and the massive increase in their costs as a component out of other prices?
Please tell as others aren’t doing so
That, or stop trolling please
“Our economy is not closed – we import substantial amounts of food and gas.”
True, but the price we pay for domestic electricity is driven by international gas prices that do not account for the use of renewables to produce domestic electricity, at much lower cost (‘a fortiori’ in Scotland). Thus on one side we have a distorted, higher price for domestic energy (in a dysfunctional domestic energy market), than is represented by domestic usage; and a large windfall gain for domestic electricity producers on the other.
We have a compensatory windfall tax (always delayed sufficently to function in the opposite way to ‘fiscal drag’; ie., it catches the income, only after the biggest windfall gains have ‘flown the coop’); thus scarcely a tax at the level that offsets the extravagant gains. We are also expending huge sums of money effectively subsidising a broken domestic energy market that remains a part of the problem (that evetyone conveniently seems to have forgotten about).
The BofE is just acting ‘like a bank’. It is the Exchequer that calls the tune.
Completely agree. My point was that, in aggregate, we must all be poorer to the extend that we pay more for imported essentials…. the issue is one of “who pays?”.
Clearly not the energy companies that are making huge profits based on marginal pricing in international markets, nor large corporations that have managed to push through price rises. It is workers – know anyone that has had a 10%+ pay rise?
So, Pill is correct to identify that, in aggregate, we are poorer and therefore not everyone can maintain real profits/income…. but we all know where that pain is being taken… and it is not by Capital.
SMEs are suffering
You make an important point. We have had a severe deterioration in our terms of trade because of the sanctions we have imposed on Russia. A drop in the standard of living of the country is therefore inevitable, at least in the short term. The big issue is how that necessary drop in the standard of living is distributed. It appears that large corporations are better able to protect their income streams through price rises than are workers in the public sector.
I agree with Clive. Pill is correct to note the impact of profit margins on inflation and the risks of wage-push inflation too.
If increasing margins (an issue in U.K. and US) are a contributory factor to core inflation then its natural for him to want to see them reduced.
Given that corporate debt service ratios are at multi decade lows, I see little concern about their ability to absorb higher borrowing costs.
Is the consensus here, that companies should be able to increase their profit margins at the expense of consumers of their goods and services?
You are only looking at large companies, not the SME sector that employs most people
And you clearly do not understand their balance sheets
Who pays you to troll?
I hope that since I own and am paid by a SME that you are incorrect, Richard. But thanks for reply nonetheless. I would advise against watching highlights from the CBk gathering with the Riksbank today. You would not want to listen to Schnabel argue that:
“Interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to our 2% medium-term target,” – the view from Europe. Take your pick?
They are all neoliberal fools
I don’t have to pick
Central bankers are lined up to destroy the livelihoods of billions
And I don’t believe your claim
Trolls aren’t hard to spot
“I do not see things Pill’s way. What I see is a brazen abuse of power to reinforce the wealth of a few at cost to most in society by an authority (the Bank of England) that is wholly out of control and which is using neoclassical economics, which has no foundation in economic reality, as a tool to oppress most in society to benefit the few who this policy will favour. Call it economic civil war, if you like.”
This is the best summary of what is going on with the Bank and related institutions of this government that I have seen. This Tory government is the worst government I think I have ever seen. This group of Tories are not fit for government. What they are actually fit for, I would hesitate to say. The consistently high degree of incompetence or malevolence has to be seen to be believed.
On an irreverant note, given mr Pill’s statements perhaps his family name lacks the “ock” which would then accurately refect, given his belief systems, what he is.
Meadway was in the G’
https://www.theguardian.com/commentisfree/2023/jan/09/keir-starmer-power-uk-cheap-labour-spending-public-services-election
Not a bad article – roughly along the lines of: want to change the NHS (etc) then more gov money is needed. Pill’s proposals go directly against that (more gov money) – because he would claim that this would drive inflation – by extension he is thus happy to see people on trolleys in hospital’s for a week. One wonders if he would be happy for a family member to have such an “interesting” experience (or perhaps they would go private?).
On a related note – the BTL under the article was mixed – I chucked in a couple of comments (re spend then tax & gov owns BoE etc). The usual imbecilies crept out of the (tory central office?) wood work gibbering on about Weimar Germany etc. Pathetic stuff. But they are only pathetic – Pill and his doctrinaire views/belief systems is dangerous.
Mike, your first para made me chuckle. Very good. And what you are imputing is certainly so. I would end with What a …, but that would only repeat what you have already pointed out.
It was gordon Brown that set them up as an Independent monetary regulator.
The next government should take back control.
It already has control, it simply chooses not to exercise it.
And that is absolutely correct.
Government is sovereign, not the BoE.
Case closed.
I have always thought that the independence of the BofE was something of an illusion. Gordon Brown made it more awkward for the government to intervene, but not impossible. I would not expect the government to interfere with the day to day running of the bank, but government oversight is still needed. I am not a lawyer but it seems to me that whenever any significant decisions are made by the bank the government has the power to intervene without changing the law. However any change in the law were required, this could be done very quickly if the political will were there.
The government can always over-rule the Bank
As a result in reality I suspect it very rarely acts without prior consent
The Treasury is the sole shareholder. Even under the most orthodox neo-liberalism the Directors sole responsibility is to the shareholder and that shareholder can convene an EGM at any time and over-rule them, boot them out, etc. You don’t need any new law for that. The BoE annual accounts freely record (see Companies House) that it is simply a subsidiary company of the Treasury Group.
Entirely agreed
One of the most major problems however, as with much else, is that the govt – fully aware it is heading straight to a debacle at the next GE – is almost immune to pressure, or feels it is, because the print media is either backing them all the way, or just grumbling, in case support for strikers undermines Saint Kier’s path to the top. Without pressure the govt can simply do as Sunak is, refuse to do anything much at all – or at least for the immediate future. The BoE isn’t slightly independent of this govt, it is wholly owned as far as I’m aware, and just pretends to be on a higher spiritual and economic plane in some way. But as the govt is fragmenting, even without the pressure to force it to act in the interests of ordinary people, so the BoE feels free to do whatever it feels like, which in this case is raise interest rates which helps no-one but the rich and damages everyone else. Clearly the media should be screaming this out – but the silence is deathly.
It is true to say this is the most extreme government since universal suffrage was implemented. Tory politicians have bought into the maxims of the lunatic Rabid Right. Represented by the theories of Milton Friedman,Hayek and the numerous so called think tanks such as the IEA ,Adam Smith Institute, Tax Payers Alliance and the even more Rabid Right groups in the US. It is beyond peradventure that Brexit was a well planned,brutally executed Right Wing plot to take us out of Europe and bring in total deregulation. Leading Tories are allies of those in recently established Fascist governments. Legislation is now in place to prevent protest .The tradition of protest marches and civil disobedience has been made illegal. Soon the right to withdraw labour will be removed. Other countries have much stronger legislation to protect collective action. What the Rabid Right are proposing is forced labour. I have a suspician the government are deliberately provoking civil unrest which will give them the excuse to declare a state of emergency. The hope is the sight of violence will have the same effect as the Miners strike in 1984. The might of the Rabid Right newspapers will be thrown into frenzzy. It is at that point the country will be on the cusp of dictatorship. Europe has several Fascist governments in place at the moment. Hungary,Poland and Italy. The Czech Republic is moving the same way. Sweden has an extreme Right wing element in government. There is nothing to stop the UK imitating those countries. After all who would have forecast in the 1960s workers condemned to a life of semi starvation in 2023 after all the new technology and scientific advances since then. Or hundreds of excess deaths because our Health Service ,once the envy of the world has been starved of funds. Since 1979 we have gone backwards . First ,slowly and accelerating in recent years. I am approaching the end of my life at 82 . I have lived through the only period when the working class had great opportunities. I worry for my grandchildren who have none of the advantages I had.
I wonder if there is method in all this madness. All these new unemployed will now be available to fill the vacancies in areas such as the health and social sector. Solving a big workforce shortage caused by BREXIT.
But how are they to support themselves on the money? And what if those jobs don’t happen to be within reasonable commuting distance?
Re : “What I see is a brazen abuse of power to reinforce the wealth of a few at cost to most in society”. Please explain how this works and which group(s) it benefits.
You really think creating strong positive interest rate returns to wealth does not do that?
If you can’t, I really am unable to help you
This really was a question not a jibe. High interest rates benefit new money but existing bond capital values are reduced. What about the effect on the exchange rate ? Isn’t there finance sector pressure to have strong sterling ?
Oh dear: it’s narrow perspective time
I really don’t have time to address the bleedin’ obvious