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Vladimir Putin is getting the blame for the inflationary spike overrunning western economies and putting the UK on course for recession.
“The Russian shock is now the largest contributor to UK inflation by some way,” said Andrew Bailey, Governor of the Bank of England, explaining the crunch engulfing the economy in terms which will surely delight the Kremlin.
But it is not the whole picture. The invasion of Ukraine might have put rocket boosters under the price of fuel and food, but there is more to this stagflationary squeeze than chaos on Europe’s eastern frontier.
In February, Threadneedle Street was already predicting a sharp acceleration in prices – weeks before tanks crossed the border and missiles rained down on Kyiv.
Inflation had risen following October’s rise in the energy price cap, and the Bank of England thought more was on the way as it anticipated a peak CPI rate of 7.25pc in April.
So what was causing inflation before the war, and is still contributing to the cost of living crisis now?
Paul Fisher, a former member of the Monetary Policy Committee (MPC) now at the Cambridge Institute for Sustainability Leadership, lists seven key factors pushing up prices. Only one is the war in Ukraine, which is affecting energy and food.
The others include pre-existing energy issues – including the lack of wind required for turbines last year – and a jump in oil and gas as economies rebounded from Covid. This jump came on top of previously pandemic-depressed oil prices which were already pushing up annual inflation, just by returning to normal.
Now inflation has taken hold, it becomes self-sustaining as businesses raise prices in anticipation of further jumps in costs and workers similarly ask for higher pay.
Meanwhile, sustained supply chain problems – exacerbated by China’s “zero Covid” campaign causing repeated lockdowns – are still wreaking havoc, extending harm to the world economy that is so reliant on the Asian powerhouse. But China is not the only problem.
Right at the top of Fisher’s list – the key factor pushing up prices – are “expansive monetary policy” in the form of low interest rates and record levels of quantitative easing (QE), and “expansive fiscal policy during the pandemic”.
That fiscal expansion, in the form of subsidies such as furlough, loans to businesses, NHS spending and higher benefits, took the budget deficit to levels not seen since the Second World War.
Borrowing peaked at £310bn in 2020-21, almost double the £157.8bn deficit in the worst year of the financial crisis.
Martin Beck, chief economic adviser to the EY Item Club, says supporting incomes of millions of workers even as they produced no output – being stuck at home and unable to work – was part of a wave of extra money which was ultimately “a root cause” of inflation today.
Combined with the other problems identified by Fisher, more money was effectively chasing fewer goods and services – with the textbook result of spiking prices.
“All of that loss of private sector income, the government stepped in and replaced a lot of it, when the output was reduced,” Beck says.
“People couldn’t spend the income at the time. The argument was supply would race ahead when the economy reopened, but it is not back to normal because of lingering effects – China’s Covid lockdowns, supply chain disruptions. Global demand is outstripping supply.”
When it comes to policymakers, the case for the defence is powerful. As Beck notes, “at the time, almost nobody said there was too much support”.
Ben Broadbent, the deputy governor for monetary policy at the Bank, argues that even if it had been possible to foresee events including the invasion of Ukraine, slashing QE and rising interest rates high enough and early enough, to combat the spike in inflation, would have inflicted a dire recession even as the nation was still reeling from Covid.
“Let's say we'd seen everything, all of this, at the tail-end of 2020, which is, given the lags, what we'd needed to have had in order to have hit the inflation target right now and offset all the effects of that on inflation right now,” he said last week.
“Interest rates, in order to offset that, would certainly have been… miles into double digit territory and we would have had a far bigger recession even than the one we're forecasting now.”
In the televised leadership debates, Sunak likes to remind Conservative members of the threat lockdown posed to employment and therefore the value of furlough which, he says, “protected 10m jobs and saved more than 1m businesses”.
When the scheme came to an end last October around 1m jobs were still being supported, raising the expectation of mass unemployment when furlough was withdrawn. It led to astonishment when, instead, the jobless rate kept falling and monetary tightening was prevented until the Bank was certain a wave of redundancies was not on the way.
The end result is that both ramped up inflation just as energy became more expensive and Russia invaded Ukraine.
Britain’s stimulus would not have had such an impact alone. Developed economies across the world launched a wide range of unprecedented economic stimulus programmes in the face of the viral threat, without knowing how long the plague would last.
America’s handouts were particularly generous, dishing out cash to families instead of seeking to preserve jobs in the manner of Britain’s furlough scheme.
That led to a wave of consumer spending, straining the trade routes from China and other suppliers of goods in particular, with ramifications for prices around the world.
In February, the Bank of England listed US spending as a key distortion in the global economy.
“Almost all of the increase in G7 goods consumption can be attributed to the US, and around half to US durable goods spending alone,” its Monetary Policy Report said.
Do not flatter Putin that he alone has wrecked western economies. Covid and the response to it by Governments and central banks have done the job too.