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CHRIS DUGGAN<\/p>\n
On Monday Andrew Bailey marks his sixth anniversary as governor of the Bank of England, a tenure dominated by two crises: the Covid-19 pandemic and Russia\u2019s invasion of Ukraine. If the hostilities in the Middle East do, as feared, lead to a serious and prolonged disruption to oil supplies, he should be getting ready for a third.<\/p>\n
Bailey has one thing in his favour. Crisis three will be just like crisis two. An energy price shock was the main economic impact in the UK of the Ukraine war, with oil and particularly gas prices shooting up rapidly. There are similarities to the current price spike; Russia invaded Ukraine in February 2022, with Brent crude then hovering around $75 a barrel. By May it hit $123, before dropping back to its pre-war level in June the following year. Gas prices started at just over 100p a therm and briefly hit an astonishing 650p a therm in August, before dropping back roughly in step with oil.<\/p>\n
Although the extreme prices did not last long, their effect on inflation was profound. It mounted steadily throughout the year, from less than 1 per cent at the start of 2022 to over 11 per cent by October. It followed what with hindsight was an obvious path. First the transport component of the consumer prices index went up \u2014 petrol and diesel prices and air fares \u2014 and then food, as higher fertiliser prices were added to the mix.<\/p>\n
Finally the \u201chousehold services\u201d section of the index rose, as higher fossil-fuel prices fed into energy bills. (Most economists, by the way, think the reason inflation went so high so fast was that the UK was still struggling to recover from the strains of the pandemic. The economy had so little spare capacity that the external shock of higher oil prices had a much greater impact than might otherwise have been the case.)<\/p>\n
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It is hard to see why something similar shouldn\u2019t happen again. This week I was at a City event where Michael Browne, global investment strategist at the fund manager Franklin Templeton, sketched out a scenario where oil supplies from the Gulf were disrupted for a few months, and oil and gas prices shot up in the way they did three years ago. What, Browne asked, should the monetary policy committee (MPC), the independent committee at the Bank of England that sets interest rates, do in response?<\/p>\n
Last time round the MPC put interest rates up to try to choke off inflation. Bank rate went up 13 times between December 2021 and August 2023, from 0.1 per cent \u2014 the historic \u201clowest since the Stone Age\u201d rate aimed at shocking some life into the economy after the pandemic \u2014 to the recent peak of 5.25 per cent. Most of the increases were one quarter of a percentage point, but three were one half, and one three-quarters.<\/p>\n
That sounds like rapid action, but in fact the Bank was heavily criticised for being too slow to act. The House of Lord economics affairs committee said the Bank had shown \u201ccomplacency about the inflation threat\u201d, while its own former chief economist Andy Haldane said it had made \u201cregrettable\u201d errors. The pile-on prompted the appointment of Ben Bernanke<\/a>, former chairman of the Federal Reserve, to lead an inquiry into the effectiveness of the Bank\u2019s forecasting.<\/p>\nCHRIS DUGGAN<\/p>\n