However, all the new evidence shows that inflation is rising and stickier (because it spreads across a wider range of goods and services) than previously thought. Central banker after central banker has confirmed that their primary goal is to maintain price stability and that they are prepared to inflict a certain amount of pain to achieve those goals. The issue is particularly acute in the UK – which, unlike the US for example, is not completely self-sufficient in energy. Sterling has fallen around 11% against the dollar so far this year. This in turn added to rising inflation because it increased the cost of imported goods such as food and gasoline. Economists say this makes the UK more prone to both recession and persistently high inflation than other Western countries. The OECD already predicts UK growth will be the second slowest in the G20 after Russia next year. It’s an enviable position to be in. Speaking at a conference of central bankers in Portugal late last month, Andrew Bailey, the Governor of the Bank of England, highlighted the dilemma. First he said he was prepared to raise interest rates aggressively to reduce inflation. However, he also added: “I think the UK economy is probably weakening rather earlier and somewhat more than others.” Right now, British households are all feeling the squeeze from inflation as their real incomes shrink and prices rise on a weekly basis. But some economists have begun to point out that the only thing worse than the pain of inflation is the pain of recession. Danny Bloodflower, an economist and former rate-setter at the Bank’s monetary policy committee, recently estimated that a one-percentage-point rise in the unemployment rate does at least five times more damage to welfare than a one-percentage-point rise in inflation. The worry is that policymakers, like bad drivers on an icy road, will overcorrect and end up veering too far in the opposite direction once they realize they’ve gone off course. It has been clear for some time that central bankers have been walking a very fine line for a few months now. But we are fast approaching the point of maximum danger.
