Most bankers are therefore at this stage relatively optimistic about the state of household finances. This clearly does not apply to the bottom 20% or those who spend a disproportionate share of their income on energy and food. Their situation is dire and will certainly require additional support before long.
But for the vast majority of people, the current inflationary shock is manageable.
We may feel angry that we have to spend the forced pandemic savings on fuel and grocery bills, rather than a great vacation in the Algarve, but there are worse fates than that. It is only when the bank rate rises significantly above 3% and unemployment above 5% that bankers will start to press the panic button. I wouldn’t rule that scenario out completely, but at this point it’s not a high probability.
What perhaps makes things worse than they really are is the manifest state of chaos in national and geopolitical governance. Never since the Cold War had international relations seemed as dangerous as they do today.
And despite its “overwhelming vast majority” – now rapidly eroding – the UK government is in a rudderless disarray, an incoherent mess of economically illiterate, supposedly crowd-pleasing initiatives that seem to lack any strategy under underlying and, unsurprisingly, end up pleasing no one and/or are quickly tossed to the side of the road. Either way planning reform or the Oxford-Cambridge Arc infrastructure project, both announced with great fanfare, but both effectively dead, killed by self-interest and negligence.
Rather than a pragmatically minded national interest government, what we have instead is a Downing Street in seemingly permanent campaign mode, a desperate scramble to save the skin of a compromised and failing Prime Minister involving a stupid or intellectually bankrupt political idea after another. He would gladly take us to war if he thought it would help him.
It was the sixth anniversary of the Brexit vote last week, so there is a lot of thinking about its economic consequences. People tend to have fixed opinions about it; no amount of “evidence” will change their minds. But what seems indisputable is that so far there has been little or no economic improvement. We’ve “taken back control”, but we don’t seem to know what to do with it.
This should come as no surprise, as the majority that voted for Brexit has always been a very broad coalition of interests, many of which were in conflict. We see that same confusion personified by the Prime Minister, who is desperately trying to square the circle between the perceived demands of his red and blue wall constituents with an increasingly confusing and undeliverable array of crowd pleasers.
But it’s actually worse than that. We also have a Cabinet that has refused to acknowledge any negative impact of Brexit. Anyone who says otherwise is condemned as a “Remainiac” whiner. Issues that are clearly linked to some extent to Brexit, such as acute staff shortages in key sectors, are being swept under the rug and not being properly addressed.
How badly things get will ultimately be determined not by the actions of Downing Street and the Bank of England, but by the sustainability of high inflation and the US Federal Reserve’s response to it.
If the Fed acts particularly aggressively, the Bank of England will have no choice but to follow suit; failure to do so would risk a collapse of sterling, adding to inflationary pressures. A government that would stop aggravating a difficult situation would nevertheless be welcome.