Boris Johnson promised Britain a ‘levelling up’ agenda – now would be a good time to start

The facts, as they say in legal circles, are not in doubt. Inflation is high (a four-decade record), it is rising (since last September) and, most worrying of all, the pace at which prices are rising is accelerating – up two percentage points on the previous annual rate of seven per cent.

It will get worse before it gets better. There may be some comfort in that our fate remains relatively tame by the post-war record of 26.9 per cent inflation in August 1975. Unlike in the 1970s – when trade union power and an accommodative government helped wages keep up with rocketing prices – wages today are falling behind. Barely have households and firms recovered from the financial crisis and the Cameron-Clegg-Osborne “age of austerity” than they are hit with another series of shocks.

This is fast becoming a wider social crisis. The question is what to do about it. Labour, unusually, has a plan that people find credible – scrap the national insurance hike on employees and employers in its entirety, abolish VAT on fuel, and pay for it with public borrowing and a windfall tax on energy companies’ supernormal profits. Some of the money would be used to smooth bills; the rest to fund a programme of investment in energy-saving technologies and insulation. These investments should pay for themselves in coming decades. Indeed, so attractive is this package that, given a free vote, many Conservative MPs would happily support it.

Instead, goaded by Keir Starmer, Boris Johnson has set his face against a windfall tax. Beyond a nominal hardship fund administered by local authorities, the government is not offering much for those who have to choose to eat or heat.

But beating inflation will need a more comprehensive macroeconomic strategy. The present situation is such an unusual confluence of economic trends that policy makers are bewildered. Or “powerless”, as the governor of the Bank of England, Andrew Bailey, confessed. The economy is set for a period of slow growth teetering on recession, while simultaneously experiencing the lowest unemployment rate since 1974, and rapidly increasing price levels.

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The usual recipe to deal with inflation is a rise in taxation, cuts to public spending and hikes in interest rates – or all three. Usually, the problem is an economy overheating because of excess demand. However, now it is much more a case of costs and prices rising because of inadequate supply. It seems foolish, and unfair, to hammer consumers and businesses to suppress prices because of shortages that are likely to be transient. But it is also the case that pumping money and demand into an economy experiencing high inflation risks making matters even worse.

The Bank of England is right to “see through” the current spike. But it is a matter of balance, and a difficult one at that. There is no case for ramping up interest rates to create unemployment, and reduce further the historically dismal levels of private investment. It would also hurt the productive capacity of the British economy. Nor is it appropriate to do nothing and give the impression of complacency.

The Treasury should adopt that nuanced approach and “support” the Bank, as was pledged in the Queen’s Speech. The “left behind” communities of Britain were promised much by this prime minister; now is the moment to show that all his expansive talks of “levelling up” was more than just a slogan.