the times | Tuesday May 17 2022 37

Business

Haldane let the inflation cat out of

the bag, and warned it was a tiger

Like the priestess

Cassandra, Andy

Haldane was ignored

F

or close watchers of “de-

globalisation”, India’s

decision at the weekend to

ban all wheat exports

marked another watershed

for the world’s creaking trading

system. The world’s second largest

wheat producer announced an

immediate ban on overseas sales

grain in an attempt to contain

domestic prices in the name of food

security. The decision was a volte-

face by Delhi’s nationalist

government, which days earlier had

promised it would “feed the world”

by ramping up wheat production and

gaining market share in the wake of

supply disruptions from Russia and

Ukraine.

India’s move is the latest in a wave

of global food protectionism that

risks tipping the world’s poorest

people further into starvation and

fanning the flames of inflation in the

rich world. More than 35 countries

have imposed restrictions on grain

imports since the war in Ukraine,

according to the World Bank,

crackdowns prompted by a record

increases in global grain and

cooking oil prices since Russia’s

invasion in late February. As the

collective breadbasket of the world,

Russia and Ukraine account for a

quarter of the world’s wheat exports,

two thirds of sunflower oil and a

quarter of barley exports.

Wheat export prices hit a 14-year

year high in March. Maize, one of

the world’s three staple grains with

wheat and rice, is trading at its

highest level since records began.

Global food prices rose by 34 per

cent last month, according to the

United Nations’ Food and

Agriculture Organisation.

Rather than capitalising on record

prices, producers such as India are

choosing to batten down the hatches

and retreat into protectionism to

feed their own people first. Delhi’s

decision comes after Indonesia

announced a ban last month on all

exports of palm oil, the most-used

vegetable oil in the world used in

foods and goods such as shampoo

and is difficult to substitute.

Poorer countries are uniquely

exposed to the political and social

ramifications of spiralling food costs.

Lower-income populations spend

disproportionately high amounts of

their incomes on basic goods.

Indonesia’s government was

prompted into action by domestic

palm oil shortages, surging inflation

and the upcoming Eid feast in the

world’s most populous Muslim

country. India’s government said its

decision had been prompted by

rising inflation and bad weather

affecting harvests.

Yet the nature of the world’s food

system means that trade restrictions

anywhere invariably drive prices

higher for the many. India is

especially vulnerable to changes in

global food prices, which account for

45 per cent of its domestic inflation

basket. South Asia as a whole runs

the world’s biggest food trade deficit.

Food protectionism is a beggar-

thy-neighbour policy. For all the

superficial attraction of food

autarky, trade embargoes push

prices higher across related

commodity markets, forcing other

countries into tit-for-tat retaliation

to protect their domestic supply.

The world has been here before,

notably during the food crisis of

2008-11, the consequences of which

included sparking mass protests

during the Arab Spring. But, as

noted by the International Panel of

Experts on Sustainable Food

Systems, fragilities in the world food

system have not been addressed.

Chief among them is the fact that

populous regions such as sub-

Saharan Africa are reliant on a

handful of vital crops from a limited

number of foreign suppliers. In good

times, global supply chains function

well and can bring down prices;

when disruption hits, the poorest

suffer the most.

The tragic irony of today’s turmoil

is that the world is not in the grip of

a food shortage but a waste crisis.

One third of all food produced is lost

or wasted every year. Using only a

fifth of this waste could feed almost

900 million people, according to

Friends of the Earth.

Mehreen Khan

It is 15 months since

Andy Haldane, who

was chief economist

at the Bank of

England, gave what

has turned out to be one of the most

prescient speeches in the history of

British economics. And no one

heeded a word of it.

In it, he tentatively warned that

inflation could be much greater than

expected as the economy recovered

from Covid. He was concerned that

central banks were being too

complacent, that the inflation “tiger”

was being let out of the cage and

would be hard to tame.

The UK inflation rate at the time

was a mere 0.7 per cent, well below

the 2 per cent target. Like Cassandra,

Haldane was destined not to be

believed — at least not by his eight

fellow interest rate-setters on the

Bank’s monetary policy committee.

The base rate was then left

unchanged at its 300-year low of

0.1 per cent for another ten months.

The Bank was to carry on with its

£875 billion money creation and

bond-buying spree, a programme

known as quantitative easing, for

another 13 months and it still hasn’t

started to reverse it.

And Andrew Bailey, the governor,

was to persist for many more months

with his sunny claim that inflation

would be mild and transitory and that

the super-stimulative position of the

Bank was the correct one.

Inflation today is 7 per cent, is

expected to rise to 9.1 per cent when

the official number for April is

declared tomorrow and, according to

the Bank’s own forecasts, is set to hit

more than 10 per cent by the end of

the year, five times higher than target.

A tiger, indeed.

Of course, much of this has been

due to recent external shocks, as

Bailey was anxious to explain

to MPs yesterday. There

was “not a lot we can

do about 80 per cent

of it [the current

inflation burst]”, he

claimed, citing the

hit to energy

costs caused by

the Ukraine

conflict and the

new shutdowns in

China. All the more reason, his critics

argue, why he should have tightened

earlier, when he had the chance, to

bear down on domestic pressures, in

particular a red-hot labour market, to

put downward pressure on other

prices that he could control and to re-

anchor inflation expectations.

This was never about seriously

putting on the brakes on the economy.

It was just about pulling back from the

Bank’s full-throttle setting, inching

back towards a more normal monetary

policy stance while the opportunity

was there. Which is why Bailey’s

claims about “carefully calibrated

policy” sound so hollow to some.

If MPs are right to question

whether he was “asleep at the wheel”

last year, then large chunks of the

City and the economics profession

have questions to answer, too. Apart

from Sir Howard Davies, chairman of

NatWest, who called for a rate rise in

July, it is hard to think of one senior

figure from the private sector who

went public to call for tighter policy.

Behind closed doors, there were

sceptics, but no one wanted to call for

something as unpopular as a rise in

the cost of mortgages. Even fewer in

the City were publicly demanding a

reversal of QE, which was gratifyingly

puffing up asset values and therefore

their end-of-year bonuses.

Some economists did a bit better.

From June onwards, our own Times

Shadow MPC, an informal grouping

of economics grandees, began calling

for QE to be wound down. By July

the House of Lords’ economic affairs

committee, whose members included

Lord King of Lothbury, the former

Bank governor, also were worried,

publishing their report QE: A

Dangerous Addiction? However, most

economists last year seemed perfectly

content to buy the “transient” theory.

Why were Haldane’s concerns

ignored? First, because he

was using his

imagination, not a skill

approved of by a

profession much

happier seizing on

trends and

cautiously

extrapolating

them another

quarter into the

future. What,

argued Haldane, if

things were now

different? What if the

globalisation and

demographic trends of the past few

decades, which had been so potent in

keeping a lid on prices, were going

into reverse? What if the slow

recovery after the financial crisis in

2008 was not a useful template for

recovery after Covid? What if money

supply growth (then running at 20 per

cent) started to behave in a different

way, pushing up spending growth and

prices? What if the nation actually

went out and spent the hundreds of

billions of pounds of savings built up

during lockdown? That approach

required a leap of faith. Much safer to

stick with the herd and wait for hard,

unambiguous facts, even if by then it

might be too late.

A second reason for economics to

be slow to adjust to this new era has

been an understandable reluctance to

generalise from particulars. Yes, there

were individual bottlenecks — in

everything from computer chips to

carbon dioxide. Yes, some

occupations were bagging gigantic

pay rises, from lawyers to lorry

drivers. But it was tempting to play

down what could just turn out to be

confusing noise and focus on the

macro picture. The backward-looking

official data weren’t producing such

egregious danger signals. Much more

scientific to concentrate on the dry

data from the ONS than listen to

anecdotal (and therefore suspect)

evidence from business leaders

howling about wage pressures,

unfilled vacancies and skill shortages.

Third, and more controversially, the

Bank might not be as independent

from its political masters as it would

like to think. QE, say the critics, is a

cynical exercise in deficit funding,

helping the Treasury to borrow on

the cheap. A prolonged burst of

inflation will do wonders in eroding

government debt in real terms.

Bailey has form in trying to please

ministers. While heading the

Financial Conduct Authority, he took

charge of an ill-conceived crusade to

water down City listing rules to allow

Saudi Aramco to gain a premium

listing in London. It was a pet goal of

Theresa May, the prime minister.

Aramco never came. Whatever the

explanation, the

tiger is uncaged and

untamed and

unquestionably

here.

‘‘

’’

Patrick Hosking is Financial Editor

of The Times

Mehreen Khan is Economics Editor of

The Times

Food protectionism risks

inflation for the rich and

starvation for the poor

Wheat price

$14

12

10

8

6

Jul Sep Nov Jan Mar May

Source: tradingeconomics.com

(Per bushel)

Patrick Hosking

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