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Inflation: The Bank of England is wrong and the Government is flailing

We need a broad civic coalition of thinkers and activists to stop the cycle of inflation and interest rate hikes. 

June 23 2023, 14.57pm

When you only have a hammer, every problem is a nail. Tried but true, this adage applies only too well to the Bank of England's decision yesterday to raise the interest rate to 5%, a level unseen since the turbulent days of the 2008 crisis.

The government’s own ideas, meanwhile, offer scant consolation - or tangible connection to reality: witness the Chancellor's economics advisor actually pleading with the Bank of England "to create a recession" to "nip in the bud" a wage-price spiral. In that same interview, when asked if we are in this wage-price spiral now, Karen Ward (who also works at JP Morgan,) responded, "I think there's certainly signs that it's emerging". But is this really the case?

While the Bank’s decision might - might - contribute to curbing inflation, it has far more immediate  repercussions that cannot be understated. As the TUC General Secretary Paul Nowak astutely points out, the interest rate hike is a consequence of perilous "dangerous groupthink in the Bank of England and Downing Street" – as well as, I should add, stagnant economic thinking. By "pushing interest rates so high that the economy is driven into recession will only make the current crisis worse, costing people their jobs and their homes".

Inducing a recession and mass unemployment as a means to combat inflation is both unnecessary and unjustifiable. The belief that inflicting widespread harm is a necessary course of action stems from an antiquated and stagnant economic discipline that fails to recognise or address the pervasive issue of unequal power dynamics. 

So, what alternatives can be pursued? Economic history offers some suggestions. 

Cast your mind back to the late 1970s when rampant inflation plagued the United States, peaking at over 11% in 1979. At that time, a pioneering organisation emerged to salvage a way out of the Carter administration's botched attempts at tackling inflation.

This organisation, aptly named Consumers Opposed to Inflation in the Necessities (COIN), materialised in October 1979 as a diverse coalition encompassing 55 groups. It brought together consumers, labour leaders, environmentalists, civil rights activists, minorities, senior citizens, and many others from across America. Their objective was to scrutinise the effectiveness of the Carter administration's anti-inflation program — specifically, its ability to control inflation in essential areas such as food, housing, energy, and healthcare, where prices were spiralling out of control.

Gar Alperovitz, a prominent political economist and influential figure within COIN, testified before a US House of Representatives sub-committee on Commerce, Consumer and Monetary Affairs, decrying insufficient solutions on offer: budget cuts, wage-price guidelines and raising the interest rate. He contended that they were unlikely to control inflation significantly, particularly in the areas that affected most consumers. And as time showed, the Volcker Shock devastated communities up and down the US.

Food, housing, energy, and healthcare were the areas that mattered most to the American public. With approximately 70% of average American family expenditures allocated to these sectors, society's most economically vulnerable segments bore the brunt of high inflation. It became clear that the conventional economic toolkit employed by policymakers was ill-suited to the task at hand. A targeted approach focusing on the sectors driving inflation was imperative—an approach that remains relevant today.

What does the story of COIN mean for us now? It provides a blueprint for individuals across the United Kingdom to come together and propose bold, transformative economic ideas. As we examine the current debate surrounding inflation, we find that it predominantly emanates from a select few spheres—economists, policymakers, and think tanks. But should we accept this as the norm? Should decisions pertaining to our economic well-being be confined to the discourse among a limited group of individuals? It is time to transcend such limitations. We must forge a collective voice, amplifying the perspectives of workers, minorities, students, environmentalists, and others, exerting pressure on the economic policies that shape our lives.

As you may already be aware, another piece of the puzzle in combating today's inflation lies in the concept of strategic price controls. These measures aim to specifically target goods and services that experience the most significant price hikes, such as basic necessities like food and energy. As Alperovitz argued passionately in the late 1970s and early 1980s, price controls can be effective, provided they are integrated into a comprehensive strategy of democratic economic planning.

While addressing inflation in specific sectors today may prove beneficial, it would be futile if we neglect to fundamentally transform the economic structures that have led us to this point. It is akin to applying a bandage to a profusely bleeding wound. The bandage may momentarily stem the flow of blood, which should not be dismissed, but as time passes, its efficacy wanes. It will inevitably get peeled off, exposing us to the initial predicament and potentially exacerbating it.

Price controls can be a good and vital tool in the short run in limiting the growing inequality in society. Think of the minimum wage and rent controls in Berlin. However, we must not harbour the illusion that they alone will solve our problems. Unless we address the inherent conflicts regarding ownership and whose interests are served, tools like price controls will merely act as temporary measures. This does not imply that we should avoid advocating for them; on the contrary, we should actively champion their implementation. However, we must ensure that they are embedded within a framework that prioritises mechanisms for reshaping the ownership of the economy. Failing to do so will only defer the underlying issues to future generations, clinging to a desperate hope that everything will miraculously improve.