Labour created a Bank that doesn’t understand inflation

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The CPI in November was already 5.1pc up on a year earlier. The concentration of already announced price increases in the next few months is such that – when the annual consumer inflation is reported in May – it could approach or even exceed 7pc.

That will be ahead of the previous top numbers since the present inflation target regime – for a 2pc-a-year increase in the CPI – was inaugurated in December 2003.

Between December 2003 and today, a peak figure of 5.2pc has been recorded twice, for the years to September 2008 and September 2011. Happily, both these peaks were isolated and untypical.

Over the whole period of the 2pc target, the average increase in consumer prices has been 2.2pc, not quite spot on, but not far off.

Why will 2022 be unsatisfactory compared to most of the Bank’s independence era? The causes of inflation stimulate often acerbic debates among economists. The majority believe that prices depend on costs, so that a range of influences can be relevant and each inflationary episode is unique.

The current inflation surge is then not due to policy, but is to be explained by special circumstances. In particular, supply-side bottlenecks challenge the British economy – like others in the advanced world – as the post-Covid recovery takes hold.

The Bank undoubtedly shares this view. To quote from its website, summarising the November Monetary Policy Report: “Inflation has risen in many countries. As economies reopened, demand for some goods increased sharply. Some businesses have struggled to meet this extra demand, held back by, for example, shortages of materials and workers. That pushes up costs and prices.

“These effects are likely to continue pushing inflation up in the coming months. We expect these high rates of inflation to be temporary. We don’t think that demand will continue to rise as fast, and many of the shortages that are currently making it difficult for businesses to produce their products should ease.”

In its research the Bank does not refer to any measure of the quantity of money. Its analysis of inflation is entirely non-monetary, and could even be criticised as atheoretical, scrappy and ad hoc.

In this respect the Bank looks at the economy today in terms very different from the 1980s, when its economists were aware of and interested in Milton Friedman’s “monetarism”, even if they were far from sharing all of Friedman’s conclusions.

But the monetarist tradition survives in the UK, although held by only a minority of economists. The shadow monetary policy committee of the Institute of Economic Affairs, to which I belong, continues to represent this position. In a joint letter to a newspaper in April last year, 10 members of the committee were forthright about the inflation risks.

In their words: “We write to express our concern about the rapid growth of the quantity of money in the UK. We believe that above-target inflation is to be expected in 2022 and perhaps 2023.

“In our view, the Bank of England will be to blame for this setback, as it took the measures that have pushed money growth to its current excessive level. We fear that inflation above 5pc is likely at some point in the next few years.”

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