9 July 2023

Weekly Briefing: Inflated expectations


With the independent Bank of England acting to control inflation and government keeping close control of the public finances, supporting households, and easing the supply side, we are doing everything we can to make sure expectations for higher inflation don’t become embedded…The country should feel confident that we can, and we will, get inflation back under control.

These words from Jeremy Hunt’s Mansion House speech tomorrow are what you would expect a Chancellor to say facing a situation over which they have little control. To some, they might even sound vaguely reassuring. Except, of course, they aren’t Hunt’s words, but those of then Chancellor Nadhim Zahawi in July of last year.

That Hunt could stand up tomorrow night and say something nearly identical tells its own story about how fiendishly sticky inflation has become, at least here in the UK. Once confident predictions that Rishi Sunak would cruise to his target of halving inflation by the end of the year have turned quickly into musings over just how long we’ll be lumped with ever-rising prices. Indeed, the five pledges Sunak made at the start of the year – on inflation, growth, debt, waiting lists and small boats – now look somewhere between shaky and downright hubristic.

For his part, Hunt says he is ‘doubling down’ on fighting inflation, chiefly by resisting calls either for the tax cuts beloved of Tory backbenchers or the punchy wage increases demanded by the public sector unions. That in turn presages a Cabinet battle, with a group of five ministers who want the Government to accept the pay review bodies’ recommendation of a 6% rise.

The Government risks the worst of all worlds – accepting an expensive pay rise but getting no credit because the offer is still well below what many of the unions are demanding. (On the plus side, the British Medical Association now says its initial demand of a 35% pay rise for junior doctors is ‘not set in stone’.)

The Bank of England would probably welcome a focus on the wage-price spiral, given how ropey its own performance on handling inflation has been. As former deputy governor Charlie Bean noted this week, the Bank was ‘too slow’ to realise the danger of increasing inflation. 

And as Laurie Laird noted on CapX this week, even if you’re inclined to defend the Bank’s policy steps, its PR has been a disaster – from Andrew Bailey telling people not to ask for wage rises to chief economist Huw Pill saying Brits should ‘stop trying to maintain their real spending power’.

Not everyone is seized by doom and gloom though. The Telegraph’s World Economy Editor, Ambrose Evans-Pritchard, argues vigorously that not only will inflation soon start plummeting, as it already has across the Atlantic, but that interest rates will not go as high as 6.5%, let alone the 7% forecast by US bank JP Morgan earlier this week. 

Analysis of the money supply would tend to support that argument, though monetarism is seen as terribly old-fashioned these days, especially at the Bank itself. Then again, given its recent track record, perhaps it’s time for a rethink.

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John Ashmore is Editor of CapX.