RUTH SUNDERLAND: We trifle with inflation at our peril

The conceit in the TV series Life on Mars was that a police officer from 2006 was teleported back to the 1970s. 

If that time-travel happened in reverse, and someone in Seventies Britain found themselves in 2021, they would be amazed by technology, woke culture, a lack of kipper ties – and the alarm over inflation. 

To them, the 2.1 per cent rate, which caused such a fuss when it was revealed a few days ago, would seem inconceivably low. 

When DCI Gene Hunt was screeching around in his mud brown Ford Cortina in 1975, inflation peaked at a monstrous 27 per cent a year. It remained a scourge into the 1980s, running at an average of around 6 per cent. 

So why the fuss now over a rate that is low by these standards and just marginally above the Bank of England’s 2 per cent target? 

One reason is that CPI inflation is rising rapidly, having been just 0.9 per cent in January. 

Other measures, such as RPI and factory gate prices, are also on a fast upward trajectory. It’s a similar story in the US, where inflation has gone up to 5 per cent in May from just 1.4 per cent in January, prompting Fed chairman Jay Powell to bring forward the time frame for raising interest rates. 

The official line, here and in the US, is that the inflation surge is a result of the post-Covid unlocking of economies, and therefore temporary and largely self-correcting. 

It would be comforting to believe this emollient version of events. Governments, which have run up large pandemic debts and want to spend big on building back better, would not relish being told a rise in interest rates is needed to curb inflation. But some, including the Bank’s departing chief economist Andy Haldane, worry that the current figures could be an augury of more serious trouble ahead. 

The Bank and the Fed have pumped hundreds of billions in stimulus into the system in response to Covid, as they did in the banking meltdown of 2008. These so-called emergency measures, albeit necessary in the short term, have become embedded. 

Government debt and central bank balance sheets have ballooned, potentially storing up serious problems.

Former governor Lord (Mervyn) King has expressed fears that central banks have allowed their independence to be compromised under political pressure. 

This could lure them into a position where they fail to clamp down on inflation hard enough, which would have disastrous consequences longer term, not least for central bankers themselves. Controlling inflation is the cornerstone of the Bank’s credibility. It has operated an inflation-targeting regime for almost 30 years. Independence – meaning the Monetary Policy Committee was free to set interest rates without political interference – followed in 1997. 

For a time it seemed to be working brilliantly well. In the Nineties and early Noughties, the UK enjoyed what Lord King dubbed the ‘Nice’ decade, standing for noninflationary, consistently expansionary. 

Growth was above trend, unemployment fell, the terms of trade improved and real wages rose. Of course, it didn’t last. The inflation-targeting approach did not prevent the financial crisis and was brought into question in the aftermath. 

But we have enjoyed low retail price inflation and low interest rates for so long that we risk taking it for granted. 

Anyone under about 60 in the UK has no lived adult experience of rampant inflation and how corrosive are its effects, economically and socially. 

We trifle with inflation at our peril. History tells us that once that Pandora’s Box is opened, it is very hard to put back the lid.