This article is taken from the May 2023 issue of The Critic. To get the full magazine why not subscribe? Right now we’re offering five issues for just £10.

Who or what is to blame for the current bout of inflation? Almost 26 years ago the Bank of England was given the job of keeping inflation at a low target figure. 

In 2003 the target became that the consumer price index should rise by 2 per cent a year. In the 18 years to the end of 2020 the increase in consumer prices averaged precisely 2.0 per cent. A fair generalisation was that Britain no longer suffered from the high and unstable inflation of the 1970s. 

The Bank of England saw the task of delivering on-target inflation as its responsibility, and it took credit for the better performance in this key area of public policy. In the 2020s much has gone wrong, however. In October last year the annual increase in the consumer price index reached 11.1 per cent. Even today the figure is over 10 per cent, more than five times the target. 

In the new circumstances does the Bank of England still want to be seen as responsible for the UK’s inflation outcomes? According to its Governor, Mr. Andrew Bailey, the answer is “no”. In evidence to the Treasury Committee of the House of Commons on 16 May last year, he said that 80 per cent of the then-looming double-digit inflation was due to “unprecedented” external developments over which his institution had no control. 

This claim was questionable. After all, Britain is not the only country in the world. If external developments were the dominant cause of the above-target inflation, then every nation should have been suffering to the same extent. If one checked inflation numbers around the world, this was not so. Admittedly, the United States and the Eurozone had much the same problem, but Japan and Switzerland did not. Moreover, inflation in the world’s two most populous nations — China and India — was much the same in 2022 and the opening months of this year as it had been in 2020 and 2021. 

Mr Bailey has now found another culprit, Britain’s old people. In a speech at the London School of Economics on 27 March he noted, “The size of the workforce — that is, the share of the population taking active part in the labour market — declined by 132,000 people, or 0.4 per cent, from the three months to December 2019 to the three months to January [2023].” 

Has the Bank of England become hopeless at public relations?

Much of this was due to a drop in the proportion of people in the 50–64 age group who were looking for work. The fall in the workforce had reduced Britain’s ability to produce goods and services, meaning — for any given growth of nominal demand — less output and higher prices. 

Unhappily, the Bank had still to combat inflation. According to The News Line website, from the Workers Revolutionary Party, “Bailey … blame[d] the working class, the elderly and the sick for driving inflation and forcing them to slam on the brakes of all the free money and cheap debt that have kept the banks from collapse for over a decade.” 

Even if one did not agree with The News Line that socialist revolution is “the only way forward”, it had made a valid point. 

The relevant sentences in Bailey’s speech are almost impossibly insensitive: “by reducing the productive capacity of the economy, the rise in inactivity driven by early retirement seems likely to have contributed to a rise in cyclical [rate of interest appropriate for the economy]. This is part of the reason why we have had to raise the Bank Rate by as much as we have.” 

On top of its other problems, has the Bank of England become hopeless at public relations? 

Anyhow, the allegation that a drop in the number of old workers accounts for double-digit inflation is preposterous. According to Bailey, the drop in the workforce from the final quarter of 2019 to the first quarter of 2023 was 0.4 per cent. In the same period the increase in consumer prices was almost 18 per cent. 

To what then, is the inflation surge to be attributed? In the spring and summer of 2020, the Bank of England — like the US Federal Reserve and the European Central Bank — responded to the Covid pandemic by huge asset purchases (or so-called “quantitative easing”). 

The result was a large boost to the quantity of money. In the subsequent three years the price level has been catching up with the money explosion, as supporters of the quantity theory of money (a.k.a. “monetarism”) predicted. 

I warned in my evidence to the House of Lords Economic Affairs Committee on 9 February 2021 that, “if there is excessive monetary growth, you get inflation … In the year to November or December, in the last money figures [in the UK], the growth rate of money was 14 per cent. The trend growth rate of the British economy in real terms output is not much more than 1 per cent [a year]. There is a huge imbalance and it will come through in inflation … What is happening at the moment in Britain … is very irresponsible.” 

The UK’s central bank is to blame for its inflation problem, not its working class, its elderly or its sick.