Rishi Sunak tried to sieze the political initative with a speech and 5 targets for his premiership. In doing so he has created confusion about monetary policy. He promised to ‘halve inflation’ over the next year. It is currently at 10.7%.
There are a few confusing things about this commitment. The first is: under the UK’s monetary framework the Bank of England is already given an inflation target, reconfirmed every year in the Chancellor’s Mansion House speech. Pursuing it is the Bank’s job, delegated to the members of the Monetary Policy Committee. Responsiblity no longer rests with the Chancellor or the PM. The point of delegating it to the Bank is to remove monetary policy from politics. The PM has mudded this delegation, appearing to assume control again himself, implying that perhaps the Bank’s MPC is not doing enough about it.
It is hard to know why he is doing this but my conjecture is that the reason is this is a way of re-affirming that the reason he cannot give in to public sector wage demands is that this conflicts with his desire to ‘fight inflation’.
As I’ve written elsewhere [see this in the New Statesman, for example, or various threads on the Twitter], the attempt to link public sector pay strategy to the fight on inflation is disingenuous. First, the MPC can raise interest rates if necessary. Second, if a pay deal [which we work out from labour market conditions and what we want by way of public services, quality and quantity] is funded out of taxation, there would be no demand boost to respond to. The fear that public sector pay settlements will stoke inflation is, I think, just that.
Another confusion generated is the difference between 5% and 2%. Stricly speaking, there is not an incoherence here.
As indicated in the Bank’s November Monetary Policy Report, and snapshotted above, inflation is expected to fall rapidly from its current level. ‘Halving in a year’ is a reasonable approximation to this forecast. But the difference between 2 and 5% is not helpful. It has required this clarification! And it begs the question - what happens after the halving? Is the PM happy for it to fall further, as the target his government gave the Bank already of 2% requires? I am sure that he is, but injecting this ambiguity is extremely poor communication.
If inflation does ‘halve’, as most expect it to under current policy settings, it will be tempting for the government to claim credit for that, and if it does so the confusion about who is doing monetary policy will persist.
A final aspect of Sunak’s promise here irked me. The statement about why he has listed bringing down inflation in his commitments. The reason is “to ease the cost of living and give people financial security”.
This is more very bad communication.
The implication is that if only we had tried harder with monetary and fiscal policy, and perhaps incomes policies, and stopped inflation overshooting the target, that we would not have a ‘cost of living’ problem. Not true!
Inflation was the least worse solution we chose to respond to the cost of living problem. Not the cause of it. The fundamental cause of this problem was the increase in energy prices, [in turn caused by Putin’s invasion of Ukraine, which took Russian oil and gas out of the market for us]. This energy price increase [and actual and expected problems with Ukrainian grain harvest] pushed up food prices. Those increases are literally an increase in the ‘cost of living’ because we need food and energy in order to survive, to live. The fundamental thing going on is an increase in those prices relative to everything else, and most crucially relative to the real returns from selling our labour time.
The alternative to our chosen response, allowing the general price level to rise [a temporary burst in inflation] would have been to have very high interest rates and or very tight fiscal policy to drive down other prices and nominal wages. This would surely have generated a very large recession indeed, causing much unemployment and suffering and making what are are embarking on feel like a picnic.
The rhetorical tactic seems to be to underscore the public sector pay strategy again. ‘We must not pay public sector workers more because that means higher inflation for longer which means a higher cost of living which means we are poorer.’ Don’t be fooled. Inflation was not the evil, it was the consequence of how we grappled with it.