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Unforced errors and unwelcome offers

Facing criticism on a number of fronts, Bank of England governor Andrew Bailey chose to double down on Monday. To those who said the central bank was behind the curve on inflation, he argued that its hands are tied by external factors. And to those worried about the cost of living crisis, he again suggested that moderating requests for wage increases would be for the greater good.

The latter in particular betrays some strange thinking: while some 1970s comparisons loom large, this is not an era of collective bargaining, and individual actions on this front are unlikely to make a meaningful difference to price growth. Another unforced error at a tough time for central bankers.

At 9 per cent, UK CPI inflation is now the highest in the G7, the rate of increase in April surpassing that seen in the US for the first time since mid-2020 – and back then the overriding concern was disinflation, not price growth. Rising energy and transport costs (the latter driven by fuel prices) make up fully half of that 9 per cent.

Confronted with factors like these, the governor is talking a stern game. But when it comes to actions, the Bank is now more circumspect: its latest quarterly inflation report says it must balance the need for interest rate hikes with the risk that they push the UK into a serious recession.  

That would again leave US policymakers as the most aggressive hikers among developed nations. That alone is enough to have markets worried: the latest fund manager survey from Bank of America finds professional investors’ optimism over global growth is at its lowest level on record.

The reality on the ground isn’t quite so bearish. US industrial production and manufacturing figures released last week show both still growing at a healthy clip. Capital Economics, meanwhile, says latest retail sales figures suggest US shoppers are “single-handedly keeping the global economy afloat”. That old saying – never bet against the US consumer – is still intact for now, even if there were signs of stress in latest numbers from retail giants Walmart and Target.

Still, currency markets are drawing a contrast between the Fed and the Bank of England’s latest equivocation: despite a brief recovery this week on the back of Bailey’s latest comments, the pound continues to lose ground against the dollar. The end result may be more rising costs for UK companies already battling a bevy of other difficulties.

Many are attempting to insulate themselves from import woes by buying British: three-quarters of manufacturers have increased their number of British suppliers in the past two years, according to a survey by trade group Make UK published this week.

But whatever the problems with supply chains, or indeed in relations with its largest trading partner, the UK is not a closed economy embarking on a period of self sufficiency. Renewed sterling weakness will only increase the attraction of UK-listed companies to overseas buyers. Our pages this week detail yet more appetite in this regard, from an Emirati stake in Vodafone to the private equity take out of ContourGlobal. Interest like this suggests the quality of UK plc endures even in difficult times. Yet, as Bearbull writes on page 60 and others suggest on page 11, not all of those offers will be compelling for current shareholders.

Last but certainly not least: this week we also say goodbye to our economics writer, Chris Dillow, who is retiring after more than two decades on the magazine. All of us at the IC would like to thank Chris for his myriad efforts over the years – not least his rare ability to translate all manner of economic theory into approachable and insightful articles. You can read his regular contributions on pages 16-18, as well as one last cover feature beginning on page 28. In it, he examines investors’ attention problem: what the limits of our concentration mean for the way we invest. As ever with Chris, there’s plenty of food for thought there for readers old and new. A final piece – on retirement spending – will follow next week, and his successor starts next month.