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The Blame Game

5 July 2023

The blame game has begun on the thorny problem of inflation. Andrew Bailey, Governor of the Bank of England, blames COVID. Chancellor, Jeremy Hunt, blames the Bank of England and, latterly, the supermarket petrol retailers. Unless the decline in the inflation rate speeds up soon we can expect the mud-slinging to gather pace.

In truth, it is likely the real cause was imbedded a long while ago. The 2009/10 financial crisis was met with massive Quantitative Easing throughout the western economies – and it worked. Injecting huge doses of money into these economies by creating funds and buying bonds whilst sitting on a virtual 0% interest rate regime ensured financial devastation was avoided and economies gradually recovered their poise and began to grow again. However, QE and miniscule interest rates prevailed for another decade or more as governments clearly felt this was an easy game to play and, it seems, central bankers opted for an easy life. This massive failure of economic discipline laid the foundations for the problems we now face.

With the arrival of COVID, any thoughts western governments and central banks might have had of reining in the financial largesse was promptly cast aside. Not only that, they effectively exacerbated the problem by injecting billions more to protect ailing businesses as the effects of the pandemic, even where lockdowns were avoided, took their toll with the sudden collapse in economic activity. At this point the first real signs of inflation began to show themselves. Cheap imports from China ceased overnight, as did well laid sources of products and materials. Their ports were closed creating shortages across many industries. In such scenarios prices only go one way.

And then, of course, just as the world was recovering from COVID, Vlad the Invader launched his special military operation in the Ukraine. Energy prices took off and inflation was on its way. The kind of inflation prevalent at this point could not, in our view, have been cured by the traditional method of raising interest rates – this would have simply added to the inflationary problem. However, by this point interest rates should already have been raised several years earlier and the fact they weren’t has not helped.

The loss of European manual workers post Brexit should have been covered by British workers, one would have thought, but COVID appears to have turned us into a nation that doesn’t want to work. Staff shortages that began in agriculture and transport led to big increases in labour costs in these industries and, since then, the problem has spread. It is particularly noticeable in the public sector where the unions appear determined to maintain a regime of planned strike actions running up to the General Election.

We also mentioned recently the existence of profiteering in some areas of manufacturing and retailing. Consumer healthcare, in particular, has seen some price increases that appear extortionate and the recent uncovering of a cartel among supermarket petrol retailers should not really come as a surprise. All of the above have led to the current inflation levels which, in the UK, have been particularly sticky. The type of inflation suffered more recently has required a rise in interest rates but the risk of raising too aggressively cannot be overstated. Sticky our rates may be but they will fall quite quickly once they start and should show signs of doing that soon, we feel. Whether or not it is in time to get Rishi Sunak and Jeremy Hunt out of the mire is another matter.


Neil Morss

Chartered FCSI