Apocalypse now? How should policymakers talk about inflation?

By Gareth Jones

The Governor of the Bank of England, Andrew Bailey, faced a significant backlash from government ministers today over his comments in front of the Treasury Select Committee yesterday, where he described the rises in food prices as “apocalyptic” and warned that households face a “very big real income shock” as inflation is anticipated to hit 10% later this year.

Bailey’s comments and choice of language caused a significant amount of controversy, particularly within government, where ministers accused the Governor of being “irresponsible”. Brandon Lewis, interviewed by Sky News this morning, said he was “surprised to see that particular turn of phrase”, while other (unnamed) ministers and ex-ministers, such as Liam Fox, were far more explicit in their criticisms — accused Bailey of “complete hyperbole”.

Part of the reason Bailey’s comments have provoked this reaction is that such stark language risks damaging consumer and business confidence, as well as threatening to overshadow much of the government’s messaging on the economy. Some of today’s positive news – notably that UK unemployment fell to its lowest level in nearly 50 years according to the ONS – still managed to be overshadowed by Bailey’s comments on inflation.

The other potential reason that Bailey has raised tensions is by highlighting the limited capacity of policymakers to do anything about the number one issue affecting voters – the cost of living. Bailey stressed to the Committee yesterday that 80% of drivers of inflation are external shocks, for instance, rising energy and food prices following the invasion of Ukraine. He also highlighted the disruption to supply chains, disruption of production and the rising cost of fertilisers as major factors. He acknowledged that in this situation, the Bank of England remained “helpless” to a degree, noting that monetary policy (i.e., raising interest rates at a sharper rate) would have done little to dent the impact of external shocks.

One explanation for Bailey’s choice of words is that the Bank of England finds itself in a defensive position on one of its core remits. Allowing inflation to rise to 10% clearly represents a missed target for a policy supposedly designed to keep it at 2%. This is undoubtedly why the Governor has sought to stress the importance of external factors in driving inflation – such as the war in Ukraine. As for the government, this intervention arguably puts them under further pressure to support households on the cost of living – after all, 10% inflation will represent a significant drop in living standards for most people in the country over the coming year – a factor that could be decisive at the next election.

But beyond blame-shifting, many in government will feel that their options are also limited. There remains speculation about whether the government will make a fiscal or targeted intervention to support vulnerable households in the coming months (with reported differences between the approaches desired by Number 10 and HM Treasury) and government ministers and Conservative MPs have found themselves heavily criticised in recent media rounds, fairly or unfairly, for suggesting ways to combat the cost of living (e.g. buying own brand products, learning to cook and getting a better paid job).

All this demonstrates the high level of scrutiny that politicians are under when they’re talking about inflation and its impacts on the cost of living. Without a policy intervention that effectively tackles these challenges, many in government will be hoping that Mr Bailey’s ‘apocalyptic’ warnings ultimately prove unfounded.