Last week’s news from the Bank of England has certainly cast a damp mood over the country. The half percent hike in interest rates has heed introduced to counter high inflation. But whilst rising interest rates are normally the sign of a booming economy and rising inflation, the announcement came with a prediction of five quarters of recession from October this year.
Interestingly, I see comments from colleagues of mine who profess to know more than the Bank of England. Apparently shunning the advice of experts, hunches are better. I bet they wouldn’t shun expert advice and treatment if they needed their prostate operated on.
We are suffering from supply side shocks. Russia has tightened energy supplies, driving higher prices. This, and wider effects of the war, has had a knock on effect on food prices. Covid has resulted in displacement in global supply lines, whilst half a million people have left the workforce, depriving business of staff.
These so-called supply-side shocks are not ones that can be dealt with easily. But despite all this, businesses tell Bank of England agents demand is normal to good. So, the Bank needs to act to head off future inflation. To be clear this is not as straightforward as it sounds.
If a price goes up this month from £10 to £20, that is 100% inflation year on year. It remains at that level until a year has passed, then inflation drops to 0%, even though the price is still double what it was 13 months earlier. Costs have gone up but the inflation measure apparently suggest otherwise.
Meanwhile, oil and gas companies are reporting record profits, with shareholders being the enemy of the people. What is less reported is these companies are paying not 19% tax on their UK earnings, but a whopping 65%, and when the energy commodity price drops below their cost of production, shareholders lose money.
It is tempting to slash tax rates. But whilst populist, to do so would be to counter the action of the Bank of England. The proper response to this is to target support with laser guided accuracy on those households who have little or no room for manoeuvre. Getting through this economic crisis, almost entirely driven by outside factors affecting the wider world, will be tricky. But I am resolute that we target support where it is needed, not on widespread largesse.