UK Inflation Expert Warns BOE Should Halt Hikes Before Recession
2022.06.15 08:11
UK Inflation Expert Warns BOE Should Halt Hikes Before Recession
(Bloomberg) — The Bank of England should prepare to end interest-rate hikes before a likely recession early next year, according to Tim Congdon, the veteran UK monetarist who was an early prophet of the global inflation shock.
Citing a collapse in money-supply growth — the metric whose spike in 2020 first led him to warn of a coming tide of surging prices — he reckons officials should only stray “a little more” above the benchmark’s current level of 1%, and that an economic slump is already both probable and necessary.
Congdon spoke earlier this month in a wide-ranging interview with Bloomberg where, in his customary undiplomatic style, he railed against central bankers including Bank of England Governor Andrew Bailey, argued that calls for wage restraint among workers were “wicked” and slammed the economics profession that he has long eschewed.
A one-time adviser on the transformation of macroeconomic policy to Margaret Thatcher’s Conservative government in the 1980s, Congdon was one of the first to predict after the onset of the pandemic that the UK and US would face historic levels of price growth.
It was June 2020 when he made that forecast of double-digit inflation, just as economies on both sides of the Atlantic were headed for recession and prices were hitting the floor.
“It was the biggest call of my career,” he said. “I basically got it right.”
Other such soothsayers, including ex-BOE policy maker Charles Goodhart, and subsequently former Treasury Secretary Lawrence Summers and Olivier Blanchard, a former chief economist at the International Monetary Fund, have burnished their reputations.
But Congdon remains out in the cold, with the monetarism he practices — the theory that inflation can be controlled by managing the money supply — largely ignored by the economics community for at least two decades.
Over the years, central banks downgraded data on monetary aggregates and Congdon became a relic, most notable recently as economics spokesman for the pro-Brexit UK Independence Party.
But his ideas and those of his economic hero, the Nobel-Prize winner Milton Friedman, have regained traction now that inflation has hit 40-year highs of 9% in the UK and 8.6% in the US.
Ray Dalio, founder of Bridgewater Associates, has warned about “monetary inflation” stoked by “a lot of debt and money.” Addressing the role of central banks in taming inflation at Amundi’s World Investment Forum last week, Blanchard said: “I realize I’m talking like a monetarist.”
Former BOE Governor Mervyn King has accused central banks of making an “intellectual mistake” by keeping rates too low and pumping money into the financial system through quantitative easing. Summers, too, has drawn attention to the growth in money supply.
Congdon anticipated today’s price shock by looking at broad money growth, a metric that in the 1980s was watched as closely as inflation. In 2020, it rocketed 25% in the US and 15% in the UK. His view is that a monetary expansion on that scale can only have one outcome.
Critics say Congdon was right for the wrong reasons, and that inflation is instead a consequence of supply-chain snarl-ups, soaring energy prices, unexpected labor shortages due to the pandemic, and now the war in Ukraine. He insists those factors wouldn’t have produced inflation had the quantity of money not exploded.
“We had an adverse supply shock,” he said. “You can’t avoid the hardship, but if you respond by printing money, the result is inflation.”
Congdon is critical of officials at both the UK and US central banks. At the BOE, Deputy Governor for Monetary Policy Ben Broadbent “failed to quantify the effect of creating billions of pounds of QE,” he said. “All these people should just admit they were wrong.”
Surprisingly — as monetarists tend to be at the tough love end of the political spectrum — Congdon reckons he would be “on the dovish side” of the BOE’s Monetary Policy Committee right now, if only because money growth has collapsed since stimulus withdrawal began last last year.
A big, active reversal in quantitative easing, as the BOE is considering, would “make the recession worse than it needs to be,” he said. Congdon also dismissed the risk of a wage-price spiral.
“Trade unions don’t cause inflation, but they may cause unemployment to be higher,” he said. “If companies are reporting labor shortages, that is a sign of inflation, not a cause.”
Bailey’s calls for wage restraint among workers are “wicked,” he added.
“The working classes are entitled to demand everything they can get, and they should bargain for it,” Congdon said. “It’s academic economists — ghastly people — who are to blame for the cost-of-living crisis. Not the working classes.”
Congdon’s first big inflation warning was in 1986, after then-Chancellor of the Exchequer Nigel Lawson ended the government’s broad money target. Britain soon enough faced a housing bubble and price growth at 8.4%, its highest point until today. Subsequently he founded Lombard Street Research, which he led until 2001.
Now running the Institute of International Monetary Research, he remains an outsider in the field where he made his name, and is contemptuous of its academic establishment. While central banks are at fault for inflation, “the blame falls with the economics profession,” he insists, deriding its thinking as “trite” and “incestuous.”
“It is a disgrace,” Congdon said. “What they teach in universities is completely wrong.”
©2022 Bloomberg L.P.
