The Garrulous Jay – No Pain No Gain

When I was about 10 years old I played Margaret Thatcher in a school play. In the improbable scene in question, I’m found at the back of my house emptying my bin next to The Queen.

“What’s that?” Her Majesty asks, pointing to the old bicycle pump I’m clutching in my right hand.

“Don’t you know?” I reply. “I used it for my problems with inflation!”

For much of the last 30 years inflation has seemed like little more than an old joke. Something we had in the Eighties and before, along with big hair, British Leyland and The Black and White Minstrel Show. An embarrassing relic of the past, now only to be found in far away less developed countries with a track record for economic mismanagement.

But over the last few months inflation has returned with a vengeance. This week we found out that Consumer Prices Inflation (CPI) has stuck stubbornly at 8.7% in May, frustrating expectations of a fall, while “core” CPI, which excludes food, energy, alcohol and tobacco, actually increased to 7.1% from 6.8% in April.

The ONS cited “air travel, recreational and cultural goods and services, and second-hand cars” as the main causes of the continued rise in prices.

The Bank of England reacted with an unexpectedly large 0.5% increase in the Base Rate on Thursday, taking it to 5.0%: a level last seen in April 2008.

This has provoked a raft of stories across the media about homeowners who will struggle to pay their mortgages and tenants facing double-digit increases in their rent, squeezing living standards and draining disposable income.

There have been calls for help for those struggling to make ends meet, with both main political parties seeking to exert pressure on lenders, and the LibDems even arguing for some form of direct financial support.

Unfortunately most of these requests should fall on deaf ears.

If the stories of struggle and hardship stop that will almost certainly mean either that policymakers have capitulated and given up trying to rein in inflation, or that the monetary policy medicine has worked on the patient. In other words: no pain no gain.

However inequitable increasing interest rates are as a way to cool the economy and arrest rising prices – and I think they are given they impact particular parts of the population especially hard – they are better than the alternative of entrenched inflation.

By taking a more drastic step than was widely expected this week, it is to be hoped that the Bank of England has acted to bring down inflation further and faster than might otherwise have been the case. This in turn should lead to interest rates also coming down sooner than would otherwise have been possible.

A note of caution, though: anyone who believes we’re heading back to a world of sub-2% base rates should think again.

What we’ve seen over the last few months is really no more than a return to normality: it is the last 15 years that have been exceptional.