Prepare for an interest rate shock in this new inflationary era

Yet, having underestimated the importance of these supply-side factors in the past, central banks at first missed, and then underestimated, the significance of the turnaround of these influences in recent years and continued with their hugely expansionary policies well past their sell-by date.

As part of their critique, the authors contend that central banks became overconfident in the economic models that they use as the basis for policy decisions. Models have their place but they are not the be-all and end-all. Model-based forecasts rest on the assumption that the economy will behave as it has in the past. But sometimes the past is another country. The key to successful forecasting is spotting the changes that mean that things will not turn out as they did in the past.

Scathing though this criticism is, it makes it clear that the Bank of England is not uniquely to blame. Similar problems exist throughout the western world. Many people complain about the prevalence of groupthink at the Bank. But there has also been groupthink between central banks. Their leaders meet regularly and exchange views. It seems, though, that this has been an exchange of little value since their views have usually been pretty much the same.

Admittedly, not all countries are experiencing the degree of inflation that we are. Switzerland, China and Japan are notable exceptions. Mind you, this point can easily be overdone. In Switzerland inflation is 3.4pc. This may not sound much but by Swiss standards it is a disaster and the Swiss National Bank is rapidly tightening its policy stance.

Moreover, the Bank of England cannot really be blamed for the cost of living crisis, as opposed to the rate of inflation. These are connected but they are not the same. The former has its origins mainly in global supply-side forces. Indeed, it is striking that in Switzerland, too, real wages are under pressure. If the Bank of England had acted earlier and more toughly, price inflation here would have been lower but so would pay inflation.


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