Letter: Policymakers should recall the lessons of the 1970s oil crisis

I read Martin Sandbu’s article (“Central bankers should ease off the brakes”, Opinion, April 20) with a mixture of amusement and exasperation.

My amusement stems from Sandbu’s heroic assumption that “accelerated inflation in 2021 arose from Covid-related production disruptions”, in effect a negative supply shock.

Missing from his analysis is any discussion of excessive monetary growth, of over-extended monetary stimulus, of the spread of inflationary pressures from goods into services, of the tightness of labour markets or of the increase in wage pressures.

Sandbu’s story is primarily about relative prices, yet he doesn’t explain why such adjustments are generating so much inflation only now.

As the last few decades have amply demonstrated, in themselves relative price changes need not be associated with lasting inflation. He is guilty, I fear, of solving the desert island economist’s tin opening problem by simply assuming the presence of a tin opener.

As for exasperation, Sandbu appears to have ignored the distinction between nominal and real interest rates. By all means, keep real interest rates low if that “makes reallocating resources easier” in the wake of a negative supply shock. In a world of accelerating inflation, however, that can be achieved even as nominal policy rates rise.

In 1973, many countries experienced negative supply shocks. Yet the acceleration in inflation at that time was not solely (nor, indeed, primarily) the consequence of a quadrupling of oil prices.

Unfortunately, not all policymakers accepted this view. It’s one reason why the UK found itself in a total inflationary mess — reflecting a desire to underpin growth and to regard inflation as merely a temporary exogenous event — even as Germany and Switzerland brought inflation to heel.

Stephen King
Senior Economic Adviser
HSBC, London E14, UK