Any government that cannot control inflation will not remain a government for long. Yet we see many administrations ringing their hands and saying “its not our fault”, “its Mr Putin”, “it’s the pandemic”. Frankly none of this washes with me and here is why.
If we look across the World, and especially the Western countries we see a universal increase in inflation. It is not dissimilar to the mid 1970’s. As then it might be easy to conclude that inflation is an epidemic, like the flu and that perhaps if we snuggle up in bed and pull the covers over our heads it will go away.
However, unlike the flu, inflation is not a natural phenomenon. It is created by governments and transmitted by other governments as they impose this pestilence upon their people.
Inflation is usually caused by too rapid an increase in the quantity of money – indeed like any surplus, if there is too much money the value will fall, i.e. prices rise. If the rate of growth of the money supply is slowed down inflation can be controlled. Essentially money is created to finance the excess spending of government. Government raises money by taxes; proceeds of loans to the general public in the form of gilt edged securities; proceeds from net borrowing off foreigners. When these three sources of income are not enough they print money and issue IOU’s to the Banking system to discharge the government’s obligations. Put simply it prints money to pay its own bills , if it prints more rapidly inflation gathers pace.
Traditionally you would see growth as being the tool to increase activity to increase taxes to reduce the government shortfall and reduce the need for increased money supply. Issuing of loans from its people or from foreigners can work, but becomes more expensive as interest rates rise. Also all debt has to be serviced and eventually repaid meaning that borrowing money reduces the choices of expenditure for future governments.
Now all this is fine, but there is one big problem and that is the simple fact that our economies are reliant on energy, and in the case of Western Europe and Britain that energy is largely imported in the form of fossil fuels of oil and gas. We see coal from Columbia, Oil from the Middle East and gas from Russia. The Ukraine conflict has accelerated a problem that is not new. Britain and Western Europe are reliant upon energy imports. As Britain’s energy supply is interconnected with Europe, despite Brexit, we are all in the same boat. This means that as with the Arab Israeli conflict in the 1970’s, we have inflation led by the real cost of energy. At that time Britain could access its own oil, gas and coal with a much cleaner conscience. But nowadays environmental pressure on politicians make this unpalatable.
The simple fact is that the current energy led inflation that Britain is experiencing was avoidable and is down to the repeated negligence of successive British governments to get into place adequate home produced clean energy and storage. The simple fact is, regardless of how you view the green lobby, the increased electrification of transport and production of wind, solar and nuclear plus storage has economic sense and too little has been done too late.
This is why increasing money supply and interest rates will not, in my opinion, work, rather it needs massive and rapid increasing of the energy supply at an emergency pace to make up for prior inadequacy. This is how we beat inflation.