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Inflated expectations

Imagine an amoeba in a sci-fi horror. One moment it’s barely a speck in the Petri dish; next moment, it has taken over the laboratory. That, if you like, is the ghastly caricature of inflation feasting on itself, whereby inflation begets inflation in a pernicious feedback loop that somehow gets going comparatively easily in the UK. Thus, goes the fearful thought, who knows what longer-term effects may be caused by the UK’s current rate of inflation rising at 3 per cent, triple the pace at which it started 2021?

But, actually, should economists in general, and those at the Bank of England in particular, be so obsessed that once higher inflation gets hold still more follows in a self-sustaining process? The logic is that in wage bargaining, pay settlements are forced upwards by employees’ representatives worried that inflation will accelerate. Thus the very rise in inflation that was feared becomes a reality and so on.

Right now that fear is ubiquitous and you can understand why. Among the G7 group of the world’s biggest democracies only Italy has a worse record than the UK for controlling inflation. Apart from possible damage to monetary policy, rising inflation damages livelihoods in the real economy.

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