While central banks are primarily responsible for controlling price rise, governments are more interested in driving growth through fiscal measures.
Jonquil Lowe, senior lecturer at the Open University, UK helps decode the growth – inflation dynamics in the UK economy post the Growth Plan 2022 announcement.
“Although targeting growth is not bad policy in itself, the timing of the government’s growth plan looks wrong”
Jonquil Lowe, Senior Lecturer of Economics at the Open University, UK
There is a classic interplay of contradictions that we are witnessing in the economy where the government is trying its best to pump up demand just at the time when the Bank of England is trying to reduce it.
The BoE is aiming to stop inflation from becoming embedded in the UK’s economy which is a result of wages and prices chasing each other upwards in a wage-price spiral. Central Banks are primarily concerned with containing inflation within a pre-decided tolerance level. In the case of the Bank of England, the upper tolerance to inflation is fixed at 2 per cent.
“So, this has created a situation where there is a boost to demand but the extra supply needed to meet that demand will not happen any time soon, which means that inflation will persist for longer” adds Lowe.
Growth – Inflation Dynamics
While reasonably low, yet stable inflation is one of the prerequisites for growth, growth remains a medium to long term strategy and it is not possible to turn on the growth tap instantly.
The government is presently using tax cuts as a means to spur demand in the economy. Tax cuts have historically proven to benefit the better-off, only widening the inequality gap in an economy.
Research by academics also suggests that growth is damaged if inflation is too high and/or too volatile, because it creates an uncertain climate for business and depresses the economy as households cut spending on non-essentials and try to save extra to cope with worsening times ahead.
But there are also Price caps and guarantees…
“People and Countries cannot easily adapt to unplanned and disorderly energy price volatility”
Jonquil Lowe, Senior Lecturer of Economics at the Open University, UK
Although the proposed energy price guarantee would create a two-year breathing space for households and a much shorter six-month respite for businesses, the success of such support measures would largely depend on the improvement in global situation by the end of the period, but we will need to wait it out to see if that is the case.” said Lowe.