The Bank of England’s Failure: baked in inflation is making us all poorer
The Adam Smith Institute on Bank of England rate rises amidst high inflation and excessive Quantitative Easing.
With CPI rising to 10.4%, inflation is more baked in than many imagined. Inflation is most hurtful to the poor and vulnerable in our society, who are least able to afford price rises or renegotiate their pay. The Adam Smith Institute wants to see:
The Bank of England answer for its abject failure in meeting its 2% target and recognition that they were too slow and timid in managing inflation.
Central bankers refocus on the core types of money (such as M1 and M2), which were neglected despite huge spikes, a key cause of current inflation.
Caution against overcompensating now (through excessive rate rises), needlessly risking financial stability, and prompting bank runs, and a recession.
The government helping to counter inflation, with supply side and planning reform - not further boosts to demand that distort the economy and fail to fix the root problems in the UK economy.
CPI rising to 10.4% shows that inflation is more baked in than many imagined. The rise prolongs our cost of living crisis, punishes savers, makes goods increasingly expensive, and encourages public sector strikes as workers seek higher wages to compensate.
Inflation is most hurtful to the poorest in our society - those least able to afford price rises or renegotiate their pay. It is a moral failing of policy and leadership that the most vulnerable take on a disproportionate share of the burden.
We cannot continue to sit idly by and expect the problem to fix itself. The ASI believes there has been an abject failure of monetary policy. Although the Bank of England has independence to make rate decisions, they have materially failed to meet their 2% target. This alone should prompt the resignation of the Governor, Andrew Bailey. However, with Number 10 redirecting flak to external supply side shocks, the Old Lady of Threadneedle Street has been cleared from blame in the press and politics.
Inflation was not a transitory problem, or simply the result of Ukraine and supply shocks, but a failing of central bankers. Monetary policy was too loose in the US and UK, with a huge spike in M2 money supply during Covid. The Federal Reserve and Bank of England were too slow and too timid to raise interest rates.
The Bank of England and its peers have serious questions to answer. Central banks must stop neglecting monetary theory and re-focus on money supply metrics. It is perhaps revealing that the Federal Reserve even discontinued weekly measures of money supply (M1 and M2) in January 2021, just after they spiked and provided a clear warning sign of the inflation which would follow. Likewise, the long-run pumping of M4 (broad money) propped the economy on credit-based stilts, meaning that it remained exposed across all sectors to external shocks.
Worryingly, central bankers now risk over compensating, with rates increasing and therefore monetary policy tightening too aggressively - a key historical cause of self-inflicted bank runs and recessions. One US measure of money supply (DM4) recently declined year-on-year, its largest fall in over a decade, a worrying omen: such declines have been followed by bank runs and recessions in the past Without a proper focus on money supply, the Bank of England risks needlessly damaging financial stability, prompting avoidable bank runs or causing a recession.
Our government can help counter inflation too, by revisiting supply-side and planning reforms. For example, if the UK builds more houses, creates more childcare capacity in nurseries, and rapidly approves and builds more nuclear energy, the price of these goods will come down. Some measures in the recent budget were targeted at the right areas (e.g. childcare), but by focusing on demand not supply, failed to fix the root issues.
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For further comments, please contact Director of Communications Connor Axiotes on connor@adamsmith.org, or 07584 778207.
