The Sunday Times - UK (2022-05-22)

The Sunday Times May 22, 2022 13

The analysis, updated last

week to account for April’s

inflation figures, says a 1 per

cent increase in the food

price inflation rate adds an

additional £33 to the average

household’s grocery bills.

If the present year-on-year

inflation rate of 6.7 per cent

were to be “maintained

across the whole of 2022,

then this would be equivalent

to an increase in the average

annual household food bill of

approximately £222”.

This would equate to an

extra three weeks of food

shopping for two parents and

a child, according to an Office

for National Statistics data

analysis by personal finance

firm NimbleFins.

Bailey told MPs on Monday

that rising food prices were a

“major, major worry”, adding

that he was sorry to sound

“apocalyptic”.

Eustice is also said to have

regarded his comments as

“entirely inappropriate”, with

a source close to him stating:

“The truth is prices are rising

but they’re not skyrocketing.”

Last night a Whitehall

source confirmed Eustice had

asked for the Bank to be “fully

apprised” of Defra’s internal

data in the hope of providing

a more accurate picture of

inflation in the food sector.

“We do a lot of work on

food prices and projections,

global food supplies, where

the stores of wheat are,” they

said, “so the data will often be

more granular than what they

might have access to.”

Another pointed out that

while food price inflation

surged by 1.5 per cent in

April, this was below the

trend for overall inflation,

which rose by 2.1 per cent

over the same period.

Price increases have varied

across food categories, with

bread and cereals increasing

by 2.2 per cent, fish by 2 per

cent; meat by 1.9 per cent;

dairy products by 1.8 per

cent; while vegetables

increased by just 1.3 per cent

and fruit by 0.1 per cent.

Three-quarters of the

increase in food prices has

been attributed to wholesale

gas and oil prices, which have

fed through into higher

fertiliser prices and the costs

of logistics and production.

However, the government

believes the remaining 25 per

cent is being fuelled by wage

inflation, as workers in the

logistics, agricultural and

food production industries

demand better pay.

To date, supermarkets and

food retailers have absorbed

much of the price increases

instead of passing on the costs

to their consumers.

However, ministers are

understood to be concerned

that retailers will be unable to

cut margins further and will

be forced to hike their prices.

Government officials have

been told to challenge the

Bank of England over food

inflation after its boss warned

of “apocalyptic” prices.

George Eustice, the

environment secretary, has

asked for the Bank to by given

the government’s own data

on rising food prices. The

move, relayed to the

Department for

Environment, Food and Rural

affairs (Defra), has been

interpreted as a rebuke of

Andrew Bailey, the Bank’s

governor, who has already

faced a backlash from

ministers over rising

inflation.

However, new internal

government modelling

suggests the average British

family could see their annual

food bills rise by more than

£200 by the end of this year.

Harry Yorke,

Deputy Political Editor

Minister hits out over ‘apocalypse’ alert

The governor’s office deep in the Bank of
England has access to a pretty private
courtyard garden. In need of thinking
space when economic storms swirl
outside, the most powerful unelected
person in Britain can stroll among four
mulberry trees planted in recognition of
the fact that the earliest banknotes were
made from the bark.
But Andrew Bailey, the 121st occupant,
is unlikely to have found solace there last
week, despite the mostly sunny weather.
The Bank is in its gravest crisis since
New Labour granted it independence
25 years ago. It has been behind the curve
in forecasting inflation, which is expected
to surge past 10 per cent this year as
Russia’s invasion of Ukraine keeps energy
prices high, piling pain on consumers.
It has been criticised for waiting until
last December to increase interest rates
from their record low of 0.1 per cent, and

Bailey has

basically lost

the plot since

September

OLIVER

SHAH

Associate Editor

for the way it communicated its decision

to do so.

Bailey was nicknamed “the big sexy

turtle” by his predecessor Mark Carney

after a Financial Times article compared

his slow decision-making to the mating

habits of Galapagos tortoises. (Bailey

embraces his moniker to the extent that

he keeps a stuffed toy turtle on his desk.)

Whereas Carney was an aggressive

and self-assured former Goldman Sachs

investment banker, Bailey is a Bank

“lifer” who got the governorship after a

troubled stint running the City regulator,

the Financial Conduct Authority (FCA).

His sometimes faltering media skills

were on display last week as he described

possible food price rises as “apocalyptic”

to the Treasury select committee, gener-

ating headlines in the next day’s papers.

More telling was his statement that

80 per cent of the inflation being felt by

households was caused by soaring inter-

national energy and goods prices and

could not be punctured by higher interest

rates. “It is more than uncomfortable,”

Bailey said of his position. “I am trying to

think of a word that is even more severe

than that... To forecast 10 per cent infla-

tion then say... ‘There’s not a lot we can

do about 80 per cent of it’ is, I can tell you,

an extremely difficult place to be.”

For a government facing a cost-of-

living crisis and a possible recession, the

stumbling Bank may present a useful

scapegoat. Asked about political ten-

sions, Bailey said it was undergoing “the

biggest test” of its independent mandate.

That has worried some in the City.

“Criticism of the Bank and the broaden-

ing out into criticism of independence is

overdone and somewhat dangerous —

and I say that as someone who actually

did criticise them last year,” said Sir How-

ard Davies, chairman of NatWest and a

former Bank deputy governor. “It’s not

that I think they’re right — I argued last

summer for a rise in rates when that

wasn’t a popular point of view — but to

broaden that out into an attack on the

Bank and all its works... People ought to

be careful what they wish for.”

The modern phase of the Bank’s 328-

year history began on Tuesday, May 6,

1997, when Gordon Brown stunned the

City by announcing its liberation. Before

then, the chancellor had the final say on

interest rates. Labour handed power

over rates to a nine-strong monetary pol-

icy committee chaired by the governor. It

was tasked with keeping inflation to a

2.5 per cent target, later reduced to 2 per

cent. If the Bank missed the target by

more than a percentage point in either

direction the governor would have to

write to the chancellor explaining why. It

was a decade until the first letter arrived.

Friction between chancellors and gov-

ernors is a fact of life. Shortly after inde-

pendence, Eddie George threatened to

resign when Brown made plans to strip

the Bank of its responsibility for regulat-

ing the financial sector. Mervyn King fell

out with Brown as prime minister, who

said the governor’s criticism of his spend-

ing plans was “disastrous”. Carney,

poached from the Bank of Canada by

George Osborne, enjoyed cordial rela-

tions with David Cameron’s government

but was accused of “hysteria” by Brexit-

supporting Tories over no-deal warnings.

Bailey was installed as governor in

March 2020, a month after Rishi Sunak

became chancellor. Carney had just cut

interest rates from 0.75 to 0.25 per cent in

response to the pandemic. Bailey cut

again to 0.1 per cent a few days before the

first lockdown and injected hundreds of

billions of pounds into the economy

through quantitative easing. This flooded

the system with cheap money alongside

the £170 billion Sunak pumped in with

furlough and bailout loan schemes. The

US went further, with Joe Biden’s admin-

istration passing a gargantuan $1.9 tril-

lion stimulus package in March last year.

That is when inflation started to rear

its head around the world. As economies

emerged from lockdowns, shipping

chains struggled to keep up with resur-

gent demand and freight costs shot up.

Surprisingly tight labour markets thanks

to job support schemes resulted in short-

ages of HGV drivers and waiters.

The Bank, like the US Federal Reserve,

thought price rises would prove “transi-

tory” and held rates low. In May last year,

the MPC forecast that CPI inflation would

be 2.3 per cent by now. It touched 9 per

cent last month, its highest since 1982. It

will be higher still when energy bills go

up by a predicted £600 to almost £2,

as the price cap is raised in October.

Markets thought the Bank would

increase rates last November after Bailey

made comments interpreted as hawkish.

But it waited until December, then

embarked on four successive increases to

1 per cent. Perceptions that the MPC fid-

dled while inflation burned meant it got

no credit for being the first central bank

to tighten. The US Federal Reserve did

not act until March, although it is now on

a path towards almost 3 per cent by early

next year. The European Central Bank

has taken a softer approach: it has not yet

raised its rate from negative 0.5 per cent,

although it is expected to do so in July.

In fairness to critics, the UK has the

worst inflation among the G7 countries,

fuelled by our dependence on gas

imports. The Bank’s defenders argue that

the two big forces driving inflation came

out of the blue — the spike in global gas

prices and Putin’s invasion of Ukraine,

which put a squeeze on energy and food.

The MPC also hugely underestimated the

strength of the labour market, predicting

4.7 per cent unemployment this quarter

when it has turned out to be 3.8 per cent.

Critics have little patience for the

Bank’s rationalisations, and the criticism

increasingly focuses on Bailey person-

ally. David “Danny” Blanchflower, the

outspoken former MPC member who is

now an economics professor, said the

Bank had succumbed to “Oxbridge

group-think” and was being run by a

“clot”. “Since September, Bailey has basi-

cally lost the plot,” said Blanchflower,

who has argued for rate cuts to combat

the slowdown in consumer spending.

“And there’s no [dissenting] voice within

the MPC... Where is the debate?”

Gerard Lyons, economic adviser to

Johnson as mayor of London, said: “I

don’t think [Bailey’s] on top of the eco-

nomics or macro picture. I don’t think he

has had enough experience of either see-

ing things from the market perspective or

communicating with the market.”

The Bank is now at risk of delivering

the worst of all worlds, cranking up the

cost of borrowing as recession looms, yet

acting when it is too late to stop inflation

spreading into wage bargaining. Bailey

has talked about trying to walk a “narrow

path” between allowing inflation to rip

and damaging the economy. The big sexy

turtle knows he will need a thick shell to

withstand the brickbats as the cost-of-liv-

ing crisis threatens to push four in ten

families into fuel poverty this winter and

Johnson’s cabinet comes under intense

pressure. Two years into his eight-year

tenure, he is already in serious trouble.

“It’s a difficult phase, because there are

difficult trade-offs,” said someone close to

the governor. “The Bank can’t make all the

people happy all of the time. In fact, for the

next 18 months, it’s likely to make most

people unhappy most of the time. So being

unpopular is what it’s going to have to be.”

Editorial, page 22

Andrew Bailey, the Bank of England governor

who glories in his reptilian nickname, will

need a thick shell to withstand growing

political attacks that he misjudged inflation

ILLUSTRATION; RUSSEL HERNEMAN

The Sunday Times May 22, 2022 13

The

Bank’s

sexy

turtle

is all at sea

£170bn

How much Rishi Sunak

pumped into furlough

and bailout loan schemes