The MPC’s inflation management strategy: obstacles and criticisms
The British Monetary Policy Committee (MPC), which sets interest rates for the Bank of England (BoE), is a unique and privileged breed in many respects. Seldom, as a group of people with limited perspectives from the BoE, the Treasury, Oxford University, and one or two US investment banks also appear to be especially disengaged from recognizing, forecasting, comprehending, and assisting in the management of inflation.
It wouldn’t really matter if this kind of thing was just something the chattering classes discussed over afternoon tea. Nonetheless, inflation is a potent economic variable, and it is useful to comprehend its causes, modes of operation, and control mechanisms. In mixed market economies such as the UK, inflation plays a crucial role in shaping the central bank’s policies regarding the money supply and, consequently, interest rate-based pricing.
The Bank, which is separate from the UK Government, sets the MPC with the objective of containing inflation around the logical but somewhat nebulous two percent mark. This number makes sense because the Bank is particularly anxious to prevent deflation, or falling prices, which, if they catch on, are highly detrimental to wealth and future prospects. They also want to prevent problematically high inflation, like the kind the UK is currently experiencing, which erodes living standards and, because it is regressive, primarily affects the poorest. When food and energy prices rise, those with the lowest incomes suffer the most.
It is true that the MPC is not in complete control of inflation; far from it. In market economies, prices are a reflection of a multitude of factors, many of which originate from outside these shores, particularly in food markets where labor markets, harvests, crude oil prices, and currency values all play a role. All of which brings us back to the current inflationary cycle and the MPC and Bank’s sleeping at the wheel, which has caused significant problems for the British food system by adding fuel to the flames of the economy through its decision-making.
Without delving into economic history, global central banks performed admirably when they lifted the Western banking system out of the grip of crisis following the Financial Crash of 2008. These were remarkably unique and challenging times. Consequently, central bankers maintained too loose monetary policy for an extended period of time, becoming unduly preoccupied and fixated on financial markets rather than the real economy that surrounds them, which includes agriculture, food production, the authentication sector, and so on.
In other words, the BoE and other central banks printed money under the guise of quantitative easing and kept interest rates too low for too long, hovering around zero for an unprecedented length of time. These actions will inevitably contribute to inflation, the seeds of which were sown in earnest in the late 2000s. The foolishness of such measures became apparent when the unanticipated pandemic struck for two reasons: first, there were no tools available to boost the economy by lowering interest rates; second, supply-side pressures existed that the MPC, in its Threadneedle Street bubble, was oblivious to.
When asked about the labor market following Brexit and the impending pandemic, almost every food manufacturer or hospitality establishment would have mentioned shortages, low skill levels, and restricted supply. The pandemic made things worse by reducing the number of people available, many of whom developed chronic illnesses, and by driving up other expenses like freight. These processes were unknown to the MPC. In actuality, it was worse since they misinterpreted them when the governor, Andrew Bailey, who is prone to accidents, spoke of temporary procedures. He was as misguided as it could have been.
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Even though the British were among the most aware of Putin’s evil intentions, the MPC and the BoE were unable to explain the awful actions of Putin and his associates in Ukraine. However, that invasion increased market pressure on food, and it also caused soft commodity prices to soar in CY22. The food system faced a perfect storm due to high oil, freight, and labor costs, which caused consumer prices in the UK to rise to over 11% in October and reach a peak of almost 20% for food. Going back to the regressive nature of inflation, living standards in the UK experienced significant pressure in addition to stratospheric home energy costs.
Though the horse has already bolted, the door has now closed. The MPC finally woke up, and how—a historic increase spree that saw UK interest rates rise from 0.1 percent to 5.5 percent in less than two years. Interest rates take several quarters, if not years, to adjust, so the effects of the current cycle won’t be fully apparent until 2024 or 2025, though remortgages will experience this sooner. The purpose of the higher base rates is to make borrowing more expensive, which is intended to cool the UK economy. The effects are beginning to show, as the UK ONS CPI is currently less than 7%; Shore Capital Markets predicts that it will reach 5% by December 2023 but will still be between 3.0-4.0% by Christmas 2024.
I’ll talk about inflation and interest rates again later, but for now, let me just say that inflation rarely happens quickly. The MPC bears much of the blame for the unsettling price increase, which has been detrimental to the food system by compressing volumes and promoting down trading. It would be beneficial for them to visit farms, food factories, supermarkets, and actual lodging establishments to gain a better understanding of the workings of the economy and to manage inflation better going forward for the benefit of the food system and society at large.