Inflation policy is not only making inflation worse, it’s failing those it should protect.

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The obsession with inflation that is dominating UK economic policy at present has some justification, but only if the proposed remedies are better than the situation that might exist if no action on inflation was taken.

As I have said repeatedly, the option of taking no action on inflation is always possible. Inflation does not, contrary to claims made, usually become embedded in an economy unless other circumstances exist.

For example, it might have become embedded in the US in the 1960s, but trying to fund and fight the Vietnam war fuelled demand in that country beyond capacity limits, and inflation resulted. Such situations are, however, rare.

Those rare exceptions apart, inflation is a reaction to an exceptional shock within an economy and like all shocks, the after effects fade with time. We have had three such shocks (Covid reopening, war in Ukraine and Brexit) and only one remains now. The effects of everything but Brexit should be fading now which is why inflation is falling.

In that case any intervention has to achieve three goals. It must end inflation earlier than it would have done. It must reduce its impact on those most vulnerable to its impact. And it must not create new issues. You can suggest other conditions. All will, I suspect, be variations on these themes.

Whether raising interest rates at this moment has reduced the time period over which inflation will be suffered is open to doubt. Because all major countries are raising rates we have no control case with which to compare outcomes. So the best that can happen is that we compare what is happening with what the likely movement in the inflation indices would have been with no intervention.

Inflation indices are pretty crude mechanisms. In effect, what happens is that prices one year are compared with those a year earlier. But the reality is that inflation is calculated monthly with an index movement announced at monthly intervals. So, when the June 2023 inflation rate is announced what happens is that the June 2022 monthly change in inflation is knocked out of the annual index calculation and the June 2023 monthly change is added in its place. If the June 2023 figure is smaller than that for June 2022 then the annual rate of inflation falls. If it is bigger it rises. It's that hard to work out.

Precisely because the index works like this it was possible to predict with considerable accuracy that indices would increase until about the time of the first anniversary of the war in Ukraine, with all the price shocks it created in 2022. All of those price rises are now falling out of the index. The impact of Covid reopening has now passed. World trade prices in raw materials and commodities are now largely at pre-war levels.

It was not hard to predict as a result that the inflation index should have fallen heavily this year. I did. So did the Bank of England. Rishi Sunak gambled heavily on it, promising it would happen. And right now it is not clear that it is. Inflation is much stickier than it should be. Something has going wrong in that case.

The question to ask then is whether the measures taken to control inflation are part of the reason why inflation is not falling as fast as expected? The answer is that, of course they are.

As the IMF noted yesterday, the biggest cause of inflation stickiness now is profiteering. Some of that is reflected in higher import prices - although those should be falling rapidly now - and the rest by increased profit taking. Some of that is by companies increasing prices by more than costs have risen, with Primark being the latest to admit that it was doing this yesterday. But a big part, I suspect, is explained by significant increases in bank profits as they earn more from central governments whilst simultaneously not passing ion the benefit of interest rate rises to savers. Put simply the cure for inflation is now, in my opinion, making matters worse.

But there is another dimension to this. That is that the supposed cure for inflation, which is made up of upward interest rates and downward pressure on wages, all backed up by a programme of quantitative tightening to ensure interest rates rise, is also designed to make the impact of inflation very much worse than it need be.

Inflation is bound to make life harder for a number of groups in society. The first such group are those on relatively low and relatively fixed incomes. Pensioners, the elderly and many employees on lower wages are in this group. State benefit indexation might protect some, but it is very apparent that many others are now at a tipping point because of the denial of fair pay rises.

Then there are borrowers, where the impact is heaviest on those who combine borrowing with limited wealth. That best describes young homeowners with very high borrowing to value ratios on their properties. They might enjoy a relative fall in the real value of their debt, but if their debt servicing costs rise significantly in a way that simultaneously increases their immediate costs without any additional income to match that rise, and as a result house prices fall (as is happening in both real and absolute terms right now) then they are hit especially hard.

The third group is lenders. Whilst the income on their loans might rise with increasing interest rates, the real value of those loans fall, and they use their financial clout within the political economy to try to prevent this.

Interest rate rises only help line of these groups. That is the last.

Wage suppression for those on low pay helps none of these groups. That's easy to see in the case of the first two groups, but the risk of default also rises for lenders. So pay suppression exists solely at the whim of deluded politicians who do not realise the cost they are creating and who are obsessed with government debt without appreciating that inflation always erodes its value, which fact they fail to take into account.

Using this analysis there are almost no winners from the approach to inflation management adopted now. There are, however, plenty of losers.

The losers are those already worst off because of low pay and inequality.

The losers are also predominantly young, because they have the highest overall rate of borrowing in proportion to wealth.

The losers are the public services, for whom people can no longer afford to work.

And then there are the losers we do not see immediately. They, mostly especially, include developing countries forced to borrow in currencies other than their own. The likelihood of another global debt crisis having a massive impact on the global south is now very high.

After that, the impact is on climate change, where the measures taken make it likely much less will be spent on the transition we all need.

So, in summary, it is unlikely that any of the measures taken to tackle inflation have had much, if any, beneficial impact. They could instead have made inflation and its impact very much worse. And what they most definitely have done is made the well-being of those who any policy on inflation should seek to protect considerably worse.

And you wonder why I am angry about the incompetence of the Bank of England and those politicians from all parties who support them? You shouldn't be: they are failing us very badly.


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