Path less trodden
Lyons says: “There are always economic cycles, but what matters is how policymakers respond to being in those cycles. In the UK, governments responded by just relying on cheap money, instead of addressing structural issues in the economy.”
Azad Zangana, senior economist at Schroders, says: “The spike in commodity prices has to a large extent synchronised economic cycles again after the pandemic.”
Lyons says interest rates need to be considerably higher globally than they are now, both because the loose monetary policy of recent years has led to the very high inflation of now, and also because he believes that the excessively low interest rates have led to asset price bubbles, which are themselves economically harmful.
He also wants to see government spending increase to improve economic growth.
Moëc says that while labour shortages will likely recede in the rest of the developed world in the year ahead, something that would reduce inflation, this may not happen in the UK.
The challenge for policymakers is whether they can ensure the decline in inflation happens in such a way as not to spark a recession.
Although the US has some component of demand-side inflation within it, something which would normally be expected to be a positive for economic growth, the US economy, unlike the UK, actually recorded negative GDP growth in the most recent quarter.
The fact the US is experiencing demand-side inflation may actually increase the chance of recession, according to Moëc, as it means the central bank will need to set interest rates at a level that actually destroys demand sufficiently to eliminate inflation.
Economists say there is a neutral rate of interest where the base rate is neither too low, causing inflation, or too high and causing the economy to contract.
Moëc's point is that in the US, to combat demand-side inflation, policymakers are not actually trying to set rates to neutral, they are trying to go past neutral to set a rate that actually is too tight for the level of growth in the economy, causing growth to fall.
But he feels that in the UK and Europe, policymakers are trying simply to put rates up to neutral, and not actively force a slowdown in growth.
Catherine Mann, a member of the Bank of England’s monetary policy committee, said in a recent speech that this distinction may not actually matter.
Her view is that rate rises in the US would be expected to push the value of the dollar up relative to other currencies. And because commodities such as oil are priced in dollars wherever in the world they are traded, a stronger dollar pushes up inflation for everyone else.
