The inflation trap

Governments and central banks across most advanced economies are battling to put a lid on consumer price inflation. When at the beginning of the year, UK prime minister Rishi Sunak outlined his five key priorities – halving inflation was at the top. With UK inflation still far above the Bank of England’s two per cent target, its Monetary Policy Committee (MPC) once again decided last week to increase short-term interest rates by a further quarter of a per cent.

The focus on tackling inflation makes sense on the surface. After all, high consumer inflation – say, above five per cent per year – is always a problem for people struggling to pay their bills. However, whatever the immediate trigger, higher inflation is invariably a symptom of deeper problems in the economy and in society. A narrow focus on inflation levels can be a distraction from the real cause of people’s hardships – namely, protracted and anaemic growth in the UK and much of the rest of the West.

The key factor behind today’s economic problems is the post-2008 productivity slump. This was the cause of the wage stagnation during the 2010s. It also underlies the economic fragility that has made it much harder for Britain to cope with the supply disruptions of the past three years, caused first by the pandemic lockdowns and then the war in Ukraine. Indeed, the lockdown-related interruptions to imported supplies were what initially set off the jump in consumer prices in Western countries.

Read the full article here.

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