I do not find this line convincing at all. With the possible exception of hyperinflationary periods such as Weimar in Germany in 1923, when all confidence in the currency was lost and prices in all areas levitated together, it is normal for the inflationary process to occur by- strokes as prices go up. for some things and in some areas but not in others.
And then these other prices start to go up, and wages react, and so on. Moreover, while supply-induced increases in inflation can sometimes subside, they do not always.
In the current context of widespread labor shortages and a recent history of rapid growth in the money supply which has left consumers with substantial sums in the bank, there is every reason to believe that they are not falling. will not subside, as inflation expectations rise and companies are confident that they can pass on their higher costs without risking losing customers.
Some economists have argued that there is no point in raising interest rates to counter a surge in inflation caused by supply-side factors. It is true that higher interest rates cannot correct such problems on the supply side. They can’t cut energy prices or evoke more truck drivers. But they can influence the degree to which increases in costs and prices are passed through the system and become integrated.
In the 1970s, for example, Germany experienced the same increase in international oil prices as all other countries, but did not experience such a large increase in inflation. The reason for this was the policy set by the Bundesbank, the German central bank, and an expectation, deeply embedded in the system, that it would act strongly to control inflation.
Of course, the current situation is uncertain, and there are dangers that the Bank of England will act too hard, too soon. But there are always such dangers. It’s a judgment call.
With interest rates currently at the crisis level of 0.1 pc, a historic low, there is a marked asymmetry of risks. There are times when central banks have tightened too much and too soon (the European Central Bank gives a few examples). But the vast majority of our experience over the past decades is the exact opposite.
Now is the time for the Bank to send a clear signal that it will not allow higher inflation to take hold. Its first increase, due at the November MPC meeting, may be very minor – perhaps only up to 15 basis points, taking the bank rate to 0.25 pc.