Inflation

A transatlantic tiff is in the works. During a recent visit to an ice cream shop in Oregon, President Joe Biden lit into British prime minister Liz Truss and her recent (and recently withdrawn) tax proposals. Because this is how we do foreign policy in this country now: spouting off at random while the Chunky Monkey melts all over our hands. "I wasn’t the only one that thought it was a mistake," said Biden of Truss's tax cuts, brandishing a vanilla cone all the while. "I think that the idea of cutting taxes on the super-wealthy at a time when…I disagree with the policy, but it’s up to Britain to make that judgment, not me." And lest the Brits think they were being singled out, Biden also had tough words for the globe's other 193 countries.

It has dawned on the government that last week’s mini-Budget might have been a bit too one-sided: £70 billion worth of extra borrowing and not a single mention of spending cuts or efficiency gains has seen borrowing costs spike (up by 0.3 per cent just today). As James Forsyth reports on Coffee House, this afternoon’s announcement that a ‘medium term fiscal plan’ will be announced next month is an attempt by the Treasury to reassure markets – and convince them that fiscal responsibility has not totally disappeared from this government’s agenda. Emphasis is being placed on previous promises to make sure debt falls as a percentage of GDP in the coming years. But what about the other side of the coin?

Rising interest rates is a key pillar of Trussonomics. Liz Truss herself has always stopped short of saying this explicitly, pointing fingers instead at the Bank of England for its failure to curb spiralling inflation. But the economists advising her have made clear, in no uncertain terms, that they think interest rates have been too low for too long.  Right from the start of her leadership campaign, Truss was far more vocal about her criticisms of the Bank; a point made even clearer once she entered No. 10 and her Chancellor Kwasi Kwarteng set up bi-weekly meetings with the Bank’s governor Andrew Bailey. With this new pressure being applied on the Bank, many thought it would make history today by implementing its first 0.

In the end, it could have been worse. The Federal Reserve might have followed Sweden’s lead, with a whole one point rise in interest rates, or it could have even decided to short-circuit the whole process and go straight for a 1.5 per cent increase. Instead, it opted for the safer course, imposing a 0.75 per cent increase in rates much as the market expected. Even so, it made one thing absolutely clear. It is not going to let up in its battle to bring inflation back under control – and the rest of the world will have no option but to follow its lead. The markets were primed for another rise in rates from the Fed chairman Jay Powell today. That was precisely what he delivered. American interest rates will go up to 3.

This morning’s surprise update from the Office for National Statistics shows headline inflation at 9.9 per cent on the year to August, down slightly from 10.1 per cent in July. While consumer inflation remains at a 40-year high, the drop from double digits back into single digits has the optimists whispering: might inflation have peaked? This update is no doubt good news, but this is likely to be a brief moment of calm in an ongoing storm. The slight fall in headline inflation has primarily been driven by easing fuel prices, as the cost of oil has been on a downwards trajectory. That at least is an early sign that global markets are starting to fill in the gaps created by the West’s decision to shun Russia’s crude oil supplies.

My predecessor Christopher Fildes looked at exchange rates through a cocktail glass: three negronis for the Italian lira equivalent of a tenner, good; a $2 martini for £1, even better. That latter ratio applied briefly 30 years ago when, he wrote, the favoured tipple ‘brushed against my lips like an angel’s kiss’. It recurred during the financial crisis of 2007-08, when no one was really able to enjoy it, and has never been seen since. On Monday, as Liz Truss was crowned, the pound dipped below $1.15, in sight of its 1985 all-time low of $1.05. ‘The prospect of …parity versus the dollar,’ said Bloomberg, ‘is becoming ever less outlandish.’ What cocktail of misfortunes brought us to this?

Long gone are the days when politicians and experts dared to claim inflation was simply ‘transitory’. Now it’s hang-on-to-your-hats as prices spiral faster than anyone predicted. This morning the Office for National Statistics reveals that headline CPI inflation hit 10.1 per cent on the year in July. This double-digit figure takes inflation to a 40-year high, outpacing consensus yet again, which was 9.8 per cent. That figure means all those horrors that have been discussed for months have become more immediate: the instability that comes with spiralling prices, the risk of stagflation, increasing fears of recession as consumers grow more cautious, not to mention the very real fear that people will struggle to afford basic necessities.

To all of the bitter skeptics who doubted President Joe Biden, Treasury secretary Janet Yellen and the Federal Reserve, I have a message for you: come forth now with your most heartfelt apologies. For a few months the Ivy League know-it-alls had to back-pedal their claims that inflation was transitory. But that changed this week. After months of ridicule, it is Joe Biden and his team of Nobel Laureates (all seventeen of them) who are getting the last laugh. Inflation changed faster than anyone could have imagined. In fact, according to the White House, we went from 9.1 percent inflation in June to 0 percent inflation in July. Joe Biden — as pleased with himself as ever — couldn’t wait to break the news to the American people.