This article is taken from the July 2022 issue of The Critic. To get the full magazine why not subscribe? Right now we’re offering five issues for just £10.

May I start with the bad news? It relates to Switzerland, where the Federal Statistical Office announced on 5 May that consumer prices had risen by 0.4 per cent in April, to take the increase in the last year to 2.5 per cent. The 2.5 per cent figure was the highest since October 2008, which is undoubtedly a problem. 

The increase of 2.5 per cent compares with average consumer inflation in 2019, 2020 and 2021 of 0.4 per cent, minus 0.7 per cent and 0.6 per cent respectively. Indeed, over the last five years the typical increase in consumer prices has been just above 0.3 per cent. So, inflation today is running at eight times the kind of figure to which the Swiss are accustomed. 

Bailey’s analysis is wrong

In Britain, by contrast, the official inflation target is an increase in its consumer price index of 2 per cent a year. The Bank of England has let it be known that there is a serious risk that inflation, on this measure, could reach 10 per cent later in 2022 or early next year. 

As in Switzerland, the outcome would be a multiple of the desired level, but does it need to be said that a UK number five times the target would be much more embarrassing? A fair surmise is that the governor of the Bank of England, Andrew Bailey, would prefer to have the Swiss problem. 

Bailey has not just to apologise, but also to explain. Why is British inflation — already at 9 per cent in the year to April — heading for a double-digit rate? He gave a preliminary answer in evidence on 16 May to the Commons Treasury Committee. Bailey’s assessment is that neither he nor his colleagues at the Bank of England have been to blame. 

Instead “a sequence of shocks” has been “unprecedented”. He cited a surge in energy prices and an “apocalyptic” jump in food prices related to the Ukraine war, coming soon after supply-chain disruptions and the lingering effects of Covid. Britain’s excess inflation is due only a limited extent — 20 per cent, according to Bailey — to domestic forces. In his view, 80 per cent of the upward pressure on the consumer price index is driven by global circumstances outside the Bank’s control.

Bailey’s analysis is wrong. All the world’s countries are vulnerable to that supposed “80 per cent” from global cost and price increases. But they have dramatically different inflation rates. Switzerland is not the only example. In the year to April the consumer price index in Japan went up also by a mere 2.5 per cent. 

The Swiss National Bank is not afraid of currency appreciation

Moreover, inflation in the USA is above that in the UK. Its latest annual figure is 8.6 per cent, but in the last two years consumer prices there have climbed by 3 per cent more than in the UK and almost 10 per cent more than in Switzerland. If every country is affected by the same cost influences from internationally-traded commodities, and if these cost influences are such a fundamental determinant (“80 per cent”, allegedly) of inflation, why does consumer inflation vary so much between countries? 

Crucial in understanding Switzerland’s record is that it has a central bank which believes in the importance of monetary control to inflation. Bailey and his colleagues think that a large and conspicuous change in relative prices excuses them from paying attention to the absolute price level. It does not. 

If the quantity of money is held back appropriately, a big jump in energy and food prices is offset by reductions (or smaller increases) in the prices of other products and services, and the overall inflation rate stays down. A key variable here is the exchange rate. The Swiss National Bank is not afraid of currency appreciation, which will lower the prices of every import relative to what would otherwise have occurred. 

The second fundamental error in Bailey’s excuse is that it overlooks the inevitable connection between the prices of assets, and the prices of goods and services. In the current boom-bust cycle, as in others over the last 50 years, house prices have soared. The reason is that — with the UK’s quantity of money up by over 25 per cent in the last three years — excess money has been chasing too few assets. 

It is preposterous to claim that apocalyptic rises in food prices due to the Ukraine hostilities and a lack of shipping capacity in Asia are responsible for the 50 per cent or more rises in the price of houses in Cornwall and Pembrokeshire recorded since spring 2020. 

Switzerland at present has bad inflation news by its standards. But — as in many other similar episodes in modern times — the Bank of England’s top brass should arrange time off from their routines, take a flight to Zurich and organise interviews with their Swiss equivalents. They might learn about how, if they are somehow allowed to stay in their jobs for a few more years, they can prevent UK inflation from again reaching five times its target level.