Inflation has remained stubbornly high in the UK, and the latest data released this week shows it fell only slightly in March, staying above 10% for the eighth time in the last nine months.
Until now, the government has relied mainly on the Bank of England to try to bring the annual rate of price increase back to its 2% target, something it has clearly failed to achieve.
So what are the options for a country facing double-digit inflation?
Raising interest rates
This is the Bank’s main method of tackling the problem, and its monetary policy committee (MPC) has already raised the base rate 11 times since December 2021, now standing at 4.25%. However, during that time the annual inflation rate has almost doubled, from 5.4% to its current level.
The logic behind such moves is that higher rates make borrowing more expensive and encourage saving and less spending, which discourages price rises. However, they are indiscriminate and hit everyone who borrows, not just the better off.
Critics like former MPC member Danny Blanchflower have argued that current inflation is due to energy and supply shocks after the pandemic and Russia’s invasion of Ukraine, so cutting consumer spending is the wrong answer.
Regardless, money markets predict that the majority of the MPC, when it meets on May 11, will almost certainly take the view that high inflation means interest rates are not high enough, and will take the base measure to the 4.5% and possibly higher. like 5% at the end of the year.
lower interest rates
Türkiye has taken a more controversial and unorthodox approach, with unpromising results. Its president, Recep Tayyip Erdoğan, ordered the country’s central bank to cut rates in response to skyrocketing prices.
The failure of this policy seemed obvious when inflation surpassed 85% in October 2022. Erdoğan is running for election next month arguing for 50% inflation, but still prices rise at one of the fastest rates in the world .
France has taken a more successful tack, with Emmanuel Macron capping how much French state-owned power companies could charge their customers last January, giving them subsidies to fill the financial hole. The controls were lifted in January this year when gas and electricity prices began to fall sharply. It meant that inflation in France was almost half the rate seen in the UK through 2022.
Such measures are far from new: economist John Kenneth Galbraith designed price controls for the Roosevelt administration during World War II, which were supported by many of the most famous financial minds of the day.
Perhaps the UK could target producers and retailers with price controls to try to bring down the food inflation rate, which hit a 46-year high of 19.1% in March, sending a signal to other industries of They should refrain from making large increases. However, it would be difficult to control prices and impose caps in the Internet age.
The labor market is not what it was when Britain last experienced big price increases, in the 1970s. Unions were powerful then and demanded wage increases to offset the rising cost of living.
In 1975, when inflation reached 25%, the wages of blue-collar workers increased at an annual rate of 31.7%, while the median earnings of all employees increased by about 28% per year. A year later, to avoid a repeat, then Labor Prime Minister Harold Wilson asked unions to limit wage demands. By 1977 the deal was beginning to unravel, and in early 1979 a series of strikes led to a “winter of discontent”.
Bank of England Governor Andrew Bailey has argued that workers asking for wage increases in real terms risk repeating the mistakes of that decade, incorporating inflation into a spiral of wages and prices. Yet despite the recent round of wage increases amid labor shortages and public sector-wide strike action, few of the recent wage deals match the current double-digit headline inflation rate, and many less they overcome it.
While the Bank is trying to use the rates to crush consumer spending, there are millions of people in Britain who have saved or earned huge amounts of money during the period of Covid restrictions who are now looking to go out and spend it.
Estimates put the level of “pandemic savings” at between £200bn and £250bn. While much of it has already been spent, many analysts believe a significant amount remains.
A “windfall profit” tax on the income or wealth of the wealthiest could be justified on the grounds of redistributing wealth and reducing the risk that this spending pushes prices up further.
A “Britain scam” campaign
There is a growing argument that corporate profits have played a large role in driving prices up, with accusations that companies have raised prices to maintain their profit margins, a phenomenon dubbed “greedflation.”
Paul Donovan, the chief economist at UBS Wealth Management, said this month that a social media campaign led by the heads of the US and eurozone central banks would put an end to such speculation.
He cites a 43% increase in milk prices when “factory gate” prices only increased by 33%. “What’s somewhat different about this episode of profit-driven inflation is the potential for social media to amplify those forms of resistance.” tweeted. “If only the Fed Chairman [Jerome] Powell and the ECB President [Christine] Lagarde would collaborate on a TikTok dance routine about profit-driven inflation, it could all end.”