As 2021 ended, an article in the Guardian by the economist Isabella Weber went viral. Its online spread was lubricated by heresy. Dr Weber doubted interest rate hikes would bring down inflation. Instead, she argued that post-pandemic prices were rising because corporations were exploiting bottlenecks in supply chains to charge more and scoop windfall profits. Hence, attempts to lower inflation with higher rates, which decrease real wages and reduce employment, would not work.
The problem was the pricing power of capital not workers. Dr Weber suggested using price controls, which had been successful in keeping inflation in check after the second world war. She was prescient. When Russia’s invasion of Ukraine sent energy prices spiralling in 2022, governments around the world either adopted Dr Weber’s advice or sought her help. Critics ate their words.
The Bank of England has admitted that it had thought high prices would be transitory. It now says that all of the fall in inflation in 2023 was due to the tumbling price of energy and imported goods. That must be infuriating to people immiserated by rising mortgages or rents. Why did the Bank raise rates to a 15-year high if inflation would have fallen anyway? Ben Broadbent, the Bank’s deputy governor, told MPs in February that higher rates helped ward off “medium-term” inflation. On Wednesday, official figures are expected to show that inflation is continuing to fall. The next day the Bank’s rate-setters meet to consider its next move. They should recommend cutting rates.
There are reasons for keeping rates high or even hiking them. But they are not good ones. Quantitative easing saw the banks flush with central bank reserves while the Old Lady accumulated bonds. Higher interest rates see Britain’s central bank pay banks more to hold risk-free financial assets. When returns on the bonds the Bank purchased are lower than the interest paid on reserves, the central bank is left with a hole in its accounts that is filled by government.
This setup makes Britain different. No other major economy, says the economist Daniela Gabor, depletes Treasury coffers to boost banks’ balance sheets. Taxes are at record levels because, in part, interest rates are so high. It is a scandal that the big four banks recorded profits last year of £44bn, roughly the amount received from the government, at a time when Britain endures the longest hit to living standards in history. Getting interest rates down kills two birds with one stone. It avoids economic stagnation and ends the farce of big bank profits while Britons can’t feed themselves.
Dr Weber’s latest paper goes further, arguing that overlapping military, economic and ecological crises make the world more shock-prone. She says commodity buffer stocks or minimum inventory requirements for key goods could help soften inflationary blows. To stop the propagation of price shocks requires profiteering constraints such as price gouging legislation, taxes on windfall profits and price caps. By 2023, even the International Monetary Fund accepted that “rising corporate profits were the largest contributor to Europe’s inflation”. Data from the Common Wealth thinktank suggest price rises in fuel, electricity, food, plane tickets and insurance premiums disproportionately added to UK inflation. Britain cannot continue as if there is nothing to learn from the cost of living crisis. Economists are little use if, as John Maynard Keynes wrote, they can “only tell us that when the storm is long past the ocean is flat again”.
