Little is doing more at the moment to give credence to the aphorism that those who fail to learn from history are doomed to repeat it, than the recent signs that Britain could be on the verge of one of its largest inflationary waves for decades.
Whilst not sounding like much, in spite of being under lockdown for much of this time, the data published last week for April showing that Consumer Price Inflation rose by 1.5 per cent, up from 0.7 per cent the previous month, rightfully sent concern throughout the financial establishment. This is because many additional upward inflationary pressures are still set to come on stream later this year.
With the UK economy currently still 6.1 per cent smaller than it was pre-pandemic, following the anticipated removal of all social distancing measures on June 21st, combined with the estimated £180bn of pent up personal savings acquired during the pandemic, the UK economy looks likely to boom later this year – with the Bank of England predicting the UK’s highest GDP growth rate since the war.
A decent measure of inflation following such a boom in economic growth is of course inevitable and, in fact, welcome overall versus a shrinking economy. However, what is worrying is a whole wallop of additional inflation looks likely to be dangerously imported on top as a consequence of Biden’s unnecessarily large $1.9bn stimulus (other lockdown unlocks have shown that consumer demand tends to come back on its own anyway), as well as via a global soar in commodity prices.
In light of these pressures, rather than getting ahead of the curve, the Bank of England’s irresponsible gamble to maintain its unprecedentedly low 0.1 per cent interest rate, as well as its £895bn quantitative easing programme – despite the warnings against by its Chief Economist Andy Haldane – risks allowing an inflationary bubble to emerge that will then require far more punitive measures later.
As Britain learnt painfully in the 1970s and 1980s, such a rise in inflation never ends well, with strict controls on public spending then needed to contain it – followed by the concomitant public sector job losses and strikes.
Worst of all, in the context of the vast debts accumulated during the Covid pandemic, such as the £300bn and £100bn borrowed by the Government and small businesses respectively – whilst currently affordable due to low interest rates – repayments risk swiftly becoming unaffordable if rates have to rise significantly, which they will have to if inflation goes out of control. Lathered in so much debt, consequently, the economy and businesses lie perhaps more vulnerable to a rise in interest rates than at any other time in living history; something that would also have serious consequences for future public spending.
So instead of assuming that more and more artificial money and spending (not backed up by real economic activity) is the answer to the problems of our economy – with potentially disastrous consequences – let us hope that policymakers remember to open their history books before it is too late. Those who fail to learn the lessons of history are doomed to repeat it.