The Bank of England, and particularly its Governor Bailey, is being blamed for not having prevented the UK’s now extremely rapid inflation.
It is an ugly sight when the dogs turn on someone; and extremely hard for the individual to fight back. And Bailey is a decent man, not so versed in street fighting.
More importantly, the criticism is not warranted. The story comes in three phases.
Phase 1 saw a COVID-induced rise in the price of consumer goods relative to services. The view, not only of the Bank, but also of the US Fed and other central banks, was that this price hike would prove transitory. They were probably right. The goods v. services demand imbalance is now normalising.
Phase 2 – the energy shock – is a supply shock. It was not foreseen; and probably not foreseeable. But more importantly, supply shocks cannot be addressed by monetary policy: the Bank produces neither oil nor gas.
Phase 3, if it happens, will be a pickup in wage growth. Central banks can deal with that: but only by reducing aggregate demand, and risking recession in the process. The Bank could have acted pre-emptively to do that – and admittedly a few brave souls did call for it. But had the Bank actually done so, it would likely have been roundly criticised.
Conclusion: the Bank, as so often, is damned if it does and damned if it doesn’t.
