The inflation hawks were wrong

As NS economics editor David Blanchflower predicted, inflation has plummeted in the last year.

Last year, as inflation rose to more than 4 per cent (it eventually peaked at 5.2 per cent last September), a band of right-wing commentators and economists demanded that the Bank of England hike interest rates in an attempt to bring prices down. Andrew Sentance, then a member of the Bank's Monetary Policy Committee (MPC), bemoaned "the lack of a substantive policy response to persistent above-target inflation" and warned that "if we do not start to raise UK interest rates gradually soon, we risk having to do so more aggressively in the future". A fearful leader in the Spectator declared: "Inflation is back with a vengeance...Britain is once again in an inflationary cycle...For how much longer can high inflation be described as a blip?"

Others, however, including New Statesman economics editor David Blanchflower, argued that the spike was largely due to temporary factors such as the VAT increase, higher global commodity prices, and the depreciation of sterling, and predicted that inflation would fall back in 2012. In February 2011, in a piece entitled "Stop worrying about inflation", Blanchflower wrote:

Inflation is going to collapse in 2012 when the impact of the one-off increase in VAT, oil and commodity prices and the exchange-rate depreciation mechanically drop out of the inflation calculations. As Mervyn noted in his recent speech, these three items alone account for 3 per cent of the current 3.7 per cent CPI inflation rate.

Well, the results are in and it looks like Blanchflower was right again (as I've noted before, he was one of the few economists to warn that George Osborne's excessive austerity measures would trigger a double-dip recession). Inflation, as measured by the Consumer Price Index, was just 2.2% last month, the lowest level since November 2009 (see graph below) and only 0.2 per cent above the Bank's target rate.

Inflation is expected to rise over the next few months as this year's round of energy price increases take effect, but it is still likely to remain close to the 2 per cent target rate (which should, in any case, be raised). This should prompt the Bank to keep interest rates at their record low of 0.5 per cent and consider a third round of quantitative easing. As in the US, where Federal Reserve chairman Ben Bernanke has pledged to keep rates near zero until at least mid-2015, sustained monetary stimulus is needed to support growth and employment, not least when the government's fiscal policy remains so determinedly self-defeating. While it appears that the economy returned to growth in the third quarter, the danger of a contraction in the fourth quarter (a triple-dip recession) remains. Had the Bank listened to the inflation hawks and hiked rates, the UK would have suffered an ever deeper double-dip.

It was already clear that the Hayekian right was disastrously wrong about fiscal policy; now it's clear that it was wrong about monetary policy too.

The Bank of England building on Threadneedle Street in London. Photograph: Getty Images.

George Eaton is political editor of the New Statesman.

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Arsène Wenger: how can an intelligent manager preside over such a hollowed-out team?

The Arsenal manager faces a frustrating legacy.

Sport is obviously not all about winning, but it is about justified hope. That ­distinction has provided, until recently, a serious defence of Arsène Wenger’s Act II – the losing part. Arsenal haven’t won anything big for 13 years. But they have been close enough (and this is a personal view) to sustain the experience of investing emotionally in the story. Hope turning to disappointment is fine. It’s when the hope goes, that’s the problem.

Defeat takes many forms. In both 2010 and 2011, Arsenal lost over two legs to Barcelona in the Champions League. Yet these were rich and rewarding sporting experiences. In the two London fixtures of those ties, Arsenal drew 2-2 and won 2-1 against the most dazzling team in the world. Those nights reinvigorated my pride in sport. The Emirates Stadium had the best show in town. Defeat, when it arrived in Barcelona, was softened by gratitude. We’d been entertained, more than entertained.

Arsenal’s 5-1 surrender to Bayern Munich on 15 February was very different. In this capitulation by instalments, the fascination was macabre rather than dramatic. Having long given up on discerning signs of life, we began the post-mortem mid-match. As we pored over the entrails, the curiosity lay in the extent of the malady that had brought down the body. The same question, over and over: how could such an intelligent, deep-thinking manager preside over a hollowed-out team? How could failings so obvious to outsiders, the absence of steel and resilience, evade the judgement of the boss?

There is a saying in rugby union that forwards (the hard men) determine who wins, and the backs (the glamour boys) decide by how much. Here is a footballing equivalent: midfielders define matches, attacking players adorn them and defenders get the blame. Yet Arsenal’s players as good as vacated the midfield. It is hard to judge how well Bayern’s playmakers performed because they were operating in a vacuum; it looked like a morale-boosting training-ground drill, free from the annoying presence of opponents.

I have always been suspicious of the ­default English critique which posits that mentally fragile teams can be turned around by licensed on-field violence – a good kicking, basically. Sporting “character” takes many forms; physical assertiveness is only one dimension.

Still, it remains baffling, Wenger’s blind spot. He indulges artistry, especially the mercurial Mesut Özil, beyond the point where it serves the player. Yet he won’t protect the magicians by surrounding them with effective but down-to-earth talents. It has become a diet of collapsing soufflés.

What held back Wenger from buying the linchpin midfielder he has lacked for many years? Money is only part of the explanation. All added up, Arsenal do spend: their collective wage bill is the fourth-highest in the League. But Wenger has always been reluctant to lavish cash on a single star player, let alone a steely one. Rather two nice players than one great one.

The power of habit has become debilitating. Like a wealthy but conservative shopper who keeps going back to the same clothes shop, Wenger habituates the same strata of the transfer market. When he can’t get what he needs, he’s happy to come back home with something he’s already got, ­usually an elegant midfielder, tidy passer, gets bounced in big games, prone to going missing. Another button-down blue shirt for a drawer that is well stuffed.

It is almost universally accepted that, as a business, Arsenal are England’s leading club. Where their rivals rely on bailouts from oligarchs or highly leveraged debt, Arsenal took tough choices early and now appear financially secure – helped by their manager’s ability to engineer qualification for the Champions League every season while avoiding excessive transfer costs. Does that count for anything?

After the financial crisis, I had a revealing conversation with the owner of a private bank that had sailed through the turmoil. Being cautious and Swiss, he explained, he had always kept more capital reserves than the norm. As a result, the bank had made less money in boom years. “If I’d been a normal chief executive, I’d have been fired by the board,” he said. Instead, when the economic winds turned, he was much better placed than more bullish rivals. As a competitive strategy, his winning hand was only laid bare by the arrival of harder times.

In football, however, the crash never came. We all wrote that football’s insane spending couldn’t go on but the pace has only quickened. Even the Premier League’s bosses confessed to being surprised by the last extravagant round of television deals – the cash that eventually flows into the hands of managers and then the pockets of players and their agents.

By refusing to splash out on the players he needed, whatever the cost, Wenger was hedged for a downturn that never arrived.

What an irony it would be if football’s bust comes after he has departed. Imagine the scenario. The oligarchs move on, finding fresh ways of achieving fame, respectability and the protection achieved by entering the English establishment. The clubs loaded with debt are forced to cut their spending. Arsenal, benefiting from their solid business model, sail into an outright lead, mopping up star talent and trophies all round.

It’s often said that Wenger – early to invest in data analytics and worldwide scouts; a pioneer of player fitness and lifestyle – was overtaken by imitators. There is a second dimension to the question of time and circumstance. He helped to create and build Arsenal’s off-field robustness, even though football’s crazy economics haven’t yet proved its underlying value.

If the wind turns, Arsène Wenger may face a frustrating legacy: yesterday’s man and yet twice ahead of his time. 

Ed Smith is a journalist and author, most recently of Luck. He is a former professional cricketer and played for both Middlesex and England.

This article first appeared in the 24 February 2017 issue of the New Statesman, The world after Brexit