Liz Truss’ idea to fight inflation failed once before.
(Photo: Reuters)
The shock comes with an announcement: for the first time in 40 years, inflation in Great Britain rose again in double digits in July. What is less shocking, however, is the high rate of inflation per se. The Bank of England (BoE) had already predicted an increase to more than 13 percent in the coming months at the beginning of August.
No, what really shocks most Britons, and rightly so, is the helplessness and helplessness of politicians and the central bank. BoE boss Bailey had already capitulated to the global drivers of inflation in the spring. “Nobody could have foreseen a war in Ukraine,” argues the central banker. That’s true, but it doesn’t fully explain why the inflation rate is now five times the central bank’s inflation target.
In addition to the sharp rise in energy and food prices, there are also home-grown problems. The central bankers underestimated the supply gap on the British labor market for a long time. Similar to the US, far fewer people have returned to the labor market in the UK after the pandemic than previously thought. A historically low unemployment rate and a record number of vacancies are the consequences.
Despite the fact that the job market is favorable for them, workers are now suffering the most from inflation. Their real wages have fallen by three percent due to the sharp increase in the cost of living. No wonder many Brits are reacting with anger and strikes.
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Only a recession can correct the mistakes made by the central bank and the government
They are also angry because there has been a political leadership vacuum in London since June. Boris Johnson is an on-demand prime minister, more concerned with his plans to move and vacation than with emergency aid to struggling households. And in the midst of the worst economic crisis in 50 years, his Conservative Party is allowing itself a six-week long internal competition for the top job.
What is fatal is that the favorite Liz Truss has apparently still not recognized the seriousness of the situation. She wants to fight inflation with tax cuts. That didn’t work with Ronald Reagan. As is well known, the former US President left the fight on the price front to his then Federal Reserve Chairman Paul Volcker, who reacted to double-digit inflation rates with double-digit interest rates.
The British are still a long way from that. What is almost certain, however, is that a recession will be needed to curb inflation this time as well. Central bankers and politicians are to blame for this.
More: Inflation in the UK rises above 10 percent