Inflation crisis: is a recession the only answer?

Tory ministers have a long record of making rather callous statements about the economy, said Paul Waugh in The i Paper.

Norman Lamont famously claimed that unemployment was “a price well worth paying” to beat inflation. On the same theme, John Major declared that “if it isn’t hurting, it isn’t working”.

In the wake of the Bank of England’s decision to hike interest rates by half a point to 5% last week – heaping financial pain on mortgage holders – Rishi Sunak reached instead for an “earnest and soothing” tone. “It is going to be OK and we are going to get through this,” he told workers at an Ikea warehouse.

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The PM, who has made halving inflation by the end of the year one of his “key pledges”, reassured his audience that he was “totally, 100% on it”. But with inflation still stubbornly running at 8.7% in the UK, is there anything Sunak can do about it? And are we, in fact, going to be OK?

‘Power lies with the Bank of England’

Inflation is “largely outside ministerial control”, said The Times. There is little that can be done in Whitehall to tamp it down, “aside from arresting rises in public sector pay”. This hasn’t stopped the Government from “attempting to look busy”. Chancellor Jeremy Hunt has called in bank bosses, food producers and industry watchdogs to urge them to keep down prices and to agree steps to ease the pain for consumers. This may help “concentrate minds”. But the truth is that real power “lies two miles to the east”, in the Bank of England. Inflation “will come down as higher interest rates take hold, but not quickly”. That will require “painful interest rates for months to come”.

For Sunak, all this could hardly be “a worse launchpad for a period of important electioneering”, said Toby Helm in The Observer. More than 1.4 million fixed-rate mortgage customers will come off their deals this year, and will face significant hikes; the average increase will be £2,700 per year. In seats such as Selby in North Yorkshire, where one of three upcoming by-elections will take place, many took out large mortgages during the low-interest years.

‘Sharp slowdown and higher unemployment’

There is “a lot of anger” now. It’s not even clear that the medicine will work, said Sean O’Grady in The Independent. The usual solution to inflation is to take money out of the economy by making borrowing more expensive. But the main problems faced by Britain are not caused by “cheap money”. They’re caused by a shortage of goods and labour, thanks to Brexit, Covid, early retirement and the war in Ukraine. The Bank can’t do anything about those: all it can do is wallop a relatively small number of mortgage holders.

Even so, it must press ahead, said Martin Wolf in the FT. Wage-price spirals are already taking hold. We won’t get back to 2% inflation without “a sharp slowdown and higher unemployment” – in short, without a recession. The only alternative would be for the UK to abandon its commitment to a stable currency, as in the 1970s. That would be “an unpardonable – possibly even incurable – folly”.