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26 April 2023

Why didn’t Huw Pill point the finger at “greedflation”?

The furore over the chief economist’s comments suggests the Bank of England should be more open about the causes of inflation.

By Will Dunn

The Bank of England’s PR nightmare continues: Huw Pill, its chief economist, commented on a Columbia University podcast yesterday that Britain’s persistent inflation is the result of a “reluctance to accept that we’re all worse off, and we all have to take our share”, and that “someone needs to accept that they’re worse off and stop trying to maintain their real spending power”.

Pill’s mistake was to pretend not to know who that “someone” was. He incorrectly characterised inflation as a “pass-the-parcel game” in which economic actors demand to be fully recompensed for higher costs at each stage, and no one shoulders the cost. Birthday party aficionados, however, will know that in pass-the-parcel the item being passed on gets smaller. In the current inflation cycle, companies are raising prices around twice as fast as workers are raising their wages, so the cost being passed on is getting larger. The real spending power of workers is clearly not being maintained, while the profit margins of companies are.

As the chief economist of the Bank of England, Huw Pill obviously knows this. His colleague on the Bank’s monetary policy committee, Catherine Mann, recently told Bloomberg she was concerned that inflation was being driven by the “strong pricing power” of companies. Inquiries into “greedflation” have been launched by the US Federal Reserve and the European Central Bank.

So why couldn’t Pill say it? Bank officials know that what they say affects people’s inflation expectations. But it may also be that the Bank has to tread carefully around a government that has committed to the narrative that the country cannot afford to raise public sector pay in line with inflation, and which is desperate to repair its economic credibility by appearing to be on the side of business.

[See also: The UK’s rising inflation rate has a hidden cause: corporate greed]

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Here’s what Pill might have said, were he free to say whatever he wanted: “Very high inflation in food prices and housing costs is making everyone poorer, fast, and there’s evidence that most of this is being caused by the profit-seeking of companies. A number of these companies aren’t based in the UK, so it’s worth asking if they’re doing anything other than simply profiting from the cost-of-living crisis.

“The evidence of corporate price-gouging is widespread in corporate profit margins, in the price of milk, and in the fact that FTSE 100 CEOs – whose remuneration is typically linked to share price – are among the only people whose pay is rising above inflation.

“We’re going to have to keep raising interest rates even as inflation falls sharply back to single figures next month, because core inflation is stubbornly high and we have a limited set of tools to address it. The Daily Mail and the Telegraph will have a field day with us for ‘making everyone poorer’, and the government will be happy to let them do so, because the government needs someone else to blame for the fact that everyone else is rapidly getting poorer and it’s doing relatively little to help those most affected.”

The question is, why shouldn’t someone like Huw Pill point the finger at profit-driven inflation? Does the Bank need to fear the government? The threat occasionally raised by the likes of Liz Truss and Dominic Cummings is that the Bank could lose its independence, but this is an empty threat.

The reason for this is that governments in every advanced economy now rely on their central banks to manipulate the market for their debt by buying huge amounts of it (quantitative easing). If this wasn’t done by an (at least notionally) independent central bank, it would become obvious that the government was just buying its own debt to make it seem valuable, which might sound a bit FTX to the international investors who pay real money for UK government bonds. At which point we would get a rerun of the Truss episode, but more so. No government of sound mind would deliberately cause this to happen, so Pill and his colleagues should accept that they have more room to be honest about the real causes of inflation.

[See also: Why has Labour’s poll lead shrunk?]

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