This week the Bank of England announced a rate rise of 0.5 per cent, to 1.75 per cent. It forecast inflation will rise to 13 per cent and stay at 9 per cent into 2023, along with five consecutive quarters of recession.

Interest rates have been far too low and remain so. The Bank and the Johnson government failed to act quickly enough to control the inflation we are now seeing when they could have prevented it, and the Bank of England’s mandate and role should now clearly be reviewed.

Such a review could take a number of forms. There could be very modest changes such as changing the inflation target index from CPI to the more modern CPIH (which includes housing costs). The target could change from an annual inflation rate to an average inflation rate over time (in line with the US Federal Reserve). The mandate could make fiscal and monetary policy work more closely, by giving a general steer to the government's desired direction for interest rates. Or independence could be revoked altogether.

Whatever changes there are must address the issue of credibility. The current target has none. The Chancellor continues to set the Bank of England a 2 per cent inflation target but the Bank continues to make little effort to keep inflation at that level, except on some vague long-term basis that involves “seeing through” notionally “short-term spikes” in inflation, where “short-term” apparently now means “two and more years” and “spikes” means inflation in the double digits. This should not be considered adequate.

Control of the price level is a fundamental duty of government in a liberal market economy. The Johnson government has failed in that basic task. Hopefully, the new Prime Minister can do better.

Andrew Lilico
IEA Economics Fellow

REMEMBERING RUSSELL LEWIS (1926 - 2022)

Russell Lewis, who has died at the age of 95, was Acting General Director of the IEA (his successor, John Blundell, changed the title to Director General) for a short period in 1992.



He had a long connection with the IEA, and wrote numerous books and articles for the Institute. These were on topics as varied as protectionism, foreign aid, apartheid, the Church of England, global warming, the French Revolution and the future of the seabed. He also wrote biographies of Margaret Thatcher and Tony Benn. 

Russell, who was a journalist with the Daily Mail and the Telegraph, was actively involved in many areas of free market thinking and the Conservative Party for well over fifty years. Back in 1951 he was, alongside people such as Geoffrey Howe, a founding member of the Bow Group, which has claims to be the first British think tank.

From 1965 to 1974 he headed the Conservative Political Centre at Central Office. In the mid-1970s he chaired the Selsdon Group, which rejected the middle-of-the-road policies of pre-Thatcher Conservatives. He also played a part in the National Association for Freedom and in the Adam Smith Institute’s OMEGA project. 

Despite having once led a campaign in favour of joining the Common Market, he later ran the Maastricht Referendum Campaign alongside Bill Cash. 

Less seriously, Russell was the author of two joke books, and a non-executive director of Forest, the pro-smoking group chaired by Ralph Harris.  

We extend our sympathy to Russell's family. 

FUELING THE FIRE

Energy companies have continued to come under fire this week after BP posted bumper profits. As a result, many politicians and commentators have called for further windfall taxes to subsidise household energy bills.



IEA Energy Analyst Andy Mayer appeared on GB News and Good Morning Britain to discuss. He reminded viewers that there are already three windfall taxes on the North Sea, which brings are tax levels to near-record highs.



Writing for the IEA Blog, Andy questioned the "moral outrage attacks" on energy companies, noting that the only sustained way to get oil and gas prices down is to increase supply. He urged policymakers to deregulate the industry in order to do so:

"The UK could be helping to solve the energy crisis by utilising our own resources for domestic use and exports to help in the defence of Europe from Putin’s aggression. A situation we have made more acute by our own failure to invest and naivety about how quickly we can transition to Net Zero."



Also on the IEA blog, IEA Head of Regulatory Affairs Victoria Hewson discussed the government's recent defeat in a judicial review challenge on its Net Zero strategy, brought forward by Friends of the Earth (FotE). 

Victoria notes that while FotE's victory does not set a new legal precedent, the case provides some fascinating insights into the mechanics of the Net Zero strategy and how the binding elements of the Climate Change Act work in practice.

Commenting on the consequences of legally binding targets, Victoria said:

"Tying ministers’ hands with legally binding targets in respect of certain matters is also arbitrary and distorts decision making. The legally binding Net Zero target obliges policymakers to prioritise this objective (which the judge in the FotE case noted was immensely difficult to plan for due to multiple complexities and unknowable variables) over competing priorities, even in unforeseen circumstances such as a global pandemic and war in Europe."

iN THE MEDIA



The board has spoken... Ahead of the Bank of England's Monetary Policy Committee meeting on Thursday, the IEA's Shadow Monetary Policy Committee called on the Bank to raise interest rates to 1.75 per cent. Most members agreed that interest rates should be raised further in forthcoming months, but a significant minority felt that after this rise there should be a pause to consider the effects. Their recommendations were written up in The Times.



Through the roof... Following the Bank of England's decision, IEA Head of Public Policy Matthew Lesh wrote for The Express.

Matthew described a gloomy economic outlook: "We are entering an era of stagflation, last seen in the 1970s, made up of slow growth and high inflation. Life will be tough. Families will have to choose between heating their home or going hungry. Unions will go on strike. Political instability can be expected."

However, he noted that the government could pursue radical supply-side reform, including in the housing, childcare and energy sectors, to help bring down costs for households. You can read our report 'Cutting Through: How to address the cost of living crisis' here. 



Pound of flesh... Speaking on the Jeremy Vine Show, Matthew Lesh urged the government to start cutting taxes, pointing out that the UK's tax burden currently sits at a 70-year high.

Matthew noted: "If we keep on taxing the way we are, our overall prosperity is going to be lower. There's a point where you take too much money from people, too much from businesses, and what you end up with is a smaller economy"



You Khan't be serious... IEA Head of Lifestyle Economics Christopher Snowdon appeared on GB News to discuss London Mayor Sadiq Khan's claim that his ban on junk food advertisements on the Transport for London network has resulted in 94,867 fewer obesity cases. 

Unconvinced by the report Khan cited, Christopher said: "Khan's summary of it was fairly accurate, but the study was complete and utter nonsense!"



And BBC News included Christopher's comments in their analysis of the study by the University of Sheffield and the London School of Hygiene & Tropical Medicine (LSHTM).

Christopher noted that the report "builds on an earlier modelling study which falsely claimed that the advertising ban caused Londoners to consume 1,000 fewer calories" and pointed out that NHS data shows child obesity rates have actually increased in London faster than average since the start of the ban. Read here.

CALLING ALL STUDENTS!

The IEA's Oxbridge Training Day is fast approaching. The event will be held at the IEA office in Westminster and will take place on 21 September 2022 from 1.30 - 4pm.

The event is free to attend and participants may join virtually or in-person. For more details on the event, and how to attend, click here.



The November Teacher Seminar is also being hosted at the IEA office. The event will include presentations from IEA researchers on issues related to the academic syllabus. The focus will be on the history of economic thought, whether forecasting makes sense, and the history of the government debt crisis.

The event will take place on 2 November 2022 from 10am - 3.30pm. You can find more information on how to sign up here.