Hard Times. There could not be a more appropriate Charles Dickens novel for the moment we are in.
It began: ‘Facts alone are wanted in life. Plant nothing else, and root out everything else. You can only form the minds of reasoning animals upon facts: nothing else will ever be of any service to them.’
Printing money, even electronically, usually leads to inflation
So here are the facts — and they are very frightening to reasoning animals such as Money Marketing readers.
As a long-time sceptic towards the Monetary Policy Committee (MPC), I was surprised when I worked out the average rate of inflation during its 25 years of existence. This year is its Silver Jubilee — the first meeting was on 6 June 1997 — marking a quarter of a century since the Bank of England (BoE) was freed from political pressure and allowed to set the Bank rate the economy needed.
Around once a month, nine people meet to do just that. Eight times out of 10 they decide to do nothing. When a tweak is needed, three out of four times it is up or down by only a quarter point; as it was in June when, against many expectations and the wishes of three of its members, the MPC tweaked Bank rate up from 1% to 1.25%.
Earlier this year I was waving around a tenner, saying it would be a nine-quid note by Christmas. Now that seems optimistic
The US Federal Reserve, tackling rather lower inflation than we have here, went for a three-quarter percentage point rise from the same 1% base.
Long-term UK inflation
The MPC target is to keep inflation measured by the Consumer Prices Index (CPI) at 2% (pedants will recall it was 2.5% as measured by RPIX [RPI All Items Excluding Mortgage Interest] until it changed in November 2003).
The arithmetic shows that, from June 1997 to the start of this year, CPI has grown by the equivalent of 2.03% a year.
But the latest rise in inflation threatens to derail that long-term success.
BoE data shows the average one-year fixed-rate savings account pays 0.89%. No one can live on that
CPI inflation reached 9.1% in May and, after more than a year of rising prices, the annual CPI rise over the MPC’s 25 years is creeping up.
The Bank, of course, forecasts annual inflation will fall back to 2% “in the medium term” because its policies always work. But even it forecasts it will be “slightly above” 11% in October.
Earlier this year I was waving around a tenner, saying it would be a nine-quid note by Christmas. Now that seems optimistic.
Shock inflation rise
This vertiginous rise in inflation came from nowhere. In July 2021, CPI was bang on target. Five months earlier it had been 0.4%. Now CPI at 9.1% is the highest it has been since February 1982 — but then it was falling.
The Fed, tackling rather lower inflation than we have here, went for a three-quarter percentage point rise from the same 1% base
It was June 1979 when it last rose through 9.1% and it stayed in double figures until March 1982. So history tells us we could be in for a long period of high inflation.
And so does current affairs. Around the world the end of most Covid restrictions is boosting demand. And war is reducing supply. That iron rule of economics means prices can go only one way.
The majority of the population have never seen anything like it. When inflation last bit they were either not born or too young to care.
Older readers will recall June 1979 when CPI inflation was 9.3% and rising (we called it 11.4% RPI [Retail Prices Index] then, which is 11.7% today).
History tells us we could be in for a long period of high inflation. And so does current affairs
Then Bank rate was 14%, mortgage rates were about to increase to 12.5% and building society accounts paid 7.75% on savings, which rose to 10.25% in November. Many pensioners happily lived on that.
Today, with CPI inflation at 9.1%, the Bank rate is 1.25%, two-year fixed-rate mortgages have risen to a seven-year high of just over 3%, and BoE data shows the average one-year fixed-rate savings account pays 0.89%. No one can live on that.
Hard Times indeed.
Faced with finding a way to boost demand when inflation had gone negative but the Bank rate had been cut to the bone, the BoE invented a second lever to control the economy: quantitative easing. It magicked up £895bn out of thin air.
There could not be a more appropriate Charles Dickens novel for the moment we are in
This seemed to work at the time. But perhaps too well. Printing money, even electronically, usually leads to inflation.
Unless the BoE finds a magic new lever to control inflation while it rages around the world, there are harder times to come.
Paul Lewis is a financial journalist and host of Radio 4’s Money Box
This article featured in the August 2022 edition of MM.
If you would like to subscribe to the monthly magazine, please click here.
Don’t cry for us Argentina – we are catching you up. Just look at this:
In Nov-1970 1oz Gold Cost £15.16
Average weekly wage was £32
On a 5-day week earnings were £6.40 per day
Therefore it took 2.4 days to earn 1 oz of gold
In August 2022 1oz Gold Cost £1,791.44
Average weekly wage is £615
On a 5-day week earnings are £123 per day
Therefore it took 14.6 days to earn 1 oz of gold
So, last one out please swich off the lights (That’s if you could afford to put them on in the first place)
Price inflation per se is going to be almost irrelevant to us during the next year. The fact is, that there is going to be such an imbalance between supply and demand, for the most basic of commodities, that normal pricing mechanisms will fail to correct the imbalance.
In short, even your £9 note will be irrelevant. We simply will not have enough of a large number of certain food staples; electricity will be rationed through rotational load shedding as may be gas.
The food issue will be an interesting one for government to deal with. When certain produce is in short supply, but that cheaper substitutes are available, having more money can obviously secure the pick of the crop. Normal pricing mechanisms will balance supply and demand of something non-essential, such as avocados; and those without the purchasing power will just have to make do with Marmite on their toast instead. But when there is a shortage across the piece, what government can allow the wealthy to continue to hoover up all the pasta, bread, potatoes and rice, leaving the poor no access to affordable carbs? It is therefore just as conceivable that staples may end up rationed just as energy will be.
This will be the toughest of all Hobson’s choices for whoever next leads the government – the optics of 1950s style ration books is terrible, but the optics of people without bread and potatoes is terrible too.
Mr Lewis can’t have his thinking cap on today, or perhaps he’d see the problem with equating global inflation and BofE policies. He might want to check the Bank of England 1998 Act too, Clause 19, which reminds that the bank orders its accounts in order with what the Treasury tells it is wanted.
Excellent article Paul, great perspective on the past.
I am surprised that a commentator as economically literate as Paul Lewis should say, “Older readers will recall June 1979 when …[RPI] … inflation was … 11.7% [in today’s terms] … building society accounts paid 7.75% on savings, which rose to 10.25% in November. Many pensioners happily lived on that.”
If a saver skims off the interest accrued by their cash on deposit to spend as income, instead of compounding it, inflation devalues the buying power of the principal along with the interest generated in subsequent years, because, of course, price inflation does compound. This is why investments in real assets such as equities and property make more sense than cash deposits in times of high inflation such as we now face. As we know from past experience, however, that is not something which the cash-deposit-obsessed Mr Lewis likes to admit. Mr Lewis might also have pointed out that whereas the average fixed-rate savings account pays just 0.89%pa, the FTSE All-Share is currently yielding 3.2% according to the IA.