Inflation has remained stubbornly high in the UK, with the latest data released this week showing it dropped only slightly in March, staying above 10% for the eighth time in the past nine months.
The government has so far mostly relied on the Bank of England to try to return the annual rate of price rises to its 2% target, something it has clearly failed to do.
So what are the options for a country coping with 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 – it now stands at 4.25%. Yet during that time the annual inflation rate has nearly doubled, from 5.4% to its current level.
The logic behind such moves is that higher rates make it more expensive to borrow money and encourage saving and lower spending, therefore discouraging price rises. Yet they are indiscriminate, hitting everyone who borrows, not just the better off.
Critics such as the former MPC member Danny Blanchflower have argued that the current inflation is down to supply and energy shocks after the pandemic and Russia’s invasion of Ukraine, so dampening consumer spending is the wrong response.
Regardless, money markets predict it is nearly a certainty that a majority of the MPC will take the view when they meet on 11 May that high inflation means interest rates are not high enough, and will push the base measure to 4.5% and possibly as high as 5% by the end of the year.
Lower interest rates
Turkey has taken a more a controversial and unorthodox approach – with unpromising results. Its president, Recep Tayyip Erdoğan, ordered the country’s central bank to lower its rates in response to rocketing prices.
The failure of this policy appeared obvious when inflation topped 85% in October 2022. Erdoğan goes into an election next month championing inflation at 50%, but that still leaves prices rising at one of the fastest rates in the world.
Price controls
France has taken a more successful tack, with Emmanuel Macron capping how much the French state energy 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 steeply. It meant inflation in France was almost half the rate seen in the UK throughout 2022.
Such measures are far from new: the economist John Kenneth Galbraith designed price controls for the Roosevelt administration during the second world war, which were supported by many of the most famous financial minds of the time.
Perhaps the UK could target producers and retailers with price controls to try to lower the food inflation rate, which hit a 46-year high of 19.1% in March, sending a signal to other industries that they should refrain from large increases themselves. However, it would be difficult to monitor prices and impose caps in the internet age.
Wage controls
The labour market is not what it was when Britain last experienced huge price surges, in the 1970s. Unions were powerful then and demanded pay rises to compensate for the rising cost of living.
In 1975, when inflation hit 25%, wage rates for manual workers jumped at an annual rate of 31.7% while average earnings for all employees rose by about 28% a year. A year later, to prevent a repeat, the then prime minister, Labour’s Harold Wilson, called on unions to cap wage demands. By 1977 the deal was beginning to fall apart, and in early 1979 a series of strikes led to a “winter of discontent”.
The Bank of England governor, Andrew Bailey, has argued that workers asking for real-terms salary increases risk repeating the mistakes of that decade, embedding inflation in a wage-price spiral. However, despite the recent round of pay rises amid labour shortages and industrial action across the public sector, few of the recent pay settlements match the current double-digit headline inflation rate, never mind exceed it.
Higher taxes
While the Bank is trying to use rates to crush consumer spending, there are millions of people in Britain who have saved or made large 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” tax on incomes or wealth of the better off might be justified on the grounds of wealth redistribution and reducing the risk of this spending pushing prices even higher.
A ‘rip-off Britain’ campaign
There is a growing argument that corporate profits have played a large part in rising prices, with accusations that companies have pushed up prices to maintain their profit margins, a phenomenon nicknamed “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 kill such profiteering stone dead.
He cites a 43% increase in milk prices when “factory gate” prices only increased by 33%. “What is somewhat different in this profit-led inflation episode is the potential of social media to amplify those forms of resistance,” he tweeted. “If only Fed chair [Jerome] Powell and ECB president [Christine] Lagarde would collaborate on a TikTok dance routine about profit-led inflation, it could all be over.”
