The Bank of England raises rates to 4%: who picks up the bill?

The Bank of England has raised its key rate from 3.75% to 4%, its first increase in more than three years, according to the Guardian. Its governor hints that another rise will follow soon, to contain inflationary pressures triggered, according to the paper, by the war in Iran. Eight of the nine members of the Monetary Policy Committee voted for the move; the ninth, Catherine Mann, would have preferred a half-point hike all at once. The Guardian notes that the decision, in the middle of a cost-of-living crisis, will leave many people incredulous. The dispatch says nothing, at this stage, about the precise makeup of inflation, wages or margins: what follows is our reading.

Let us start with the grammar. "Inflation is triggered", "pressures build": in this vocabulary, prices rise the way the tide rises. This is commodity fetishism in press-release form: relations between people (companies that set prices, banks that lend, states that decide) become relations between things, and nobody seems to have done anything at all. Yet a price is always someone's price, someone who posts it. A war may make energy more expensive; it does not tell each company how, or by how much, to pass that extra cost on.

The real question, then, is who collects? A higher rate mechanically means a more generous income for those who hold savings and claims, and a heavier bill for those who owe: households with variable-rate mortgages, tenants whose landlords pass on their repayments, small businesses carrying debt. The remedy is presented as technical and neutral; its distribution is not. We do not have the figures here to measure it, but the direction of the slope is hardly mysterious.

Then there is the debate we like to dodge: does inflation come from wages or from profits? The dispatch does not settle it, and nor can we without data. But note that central banks' reflex almost always aims at the same point of application, the labour market. Cooling demand, in practice, means making jobs scarcer, and so rebuilding that reserve army of unemployed and precarious workers which makes wage claims more timid. Nobody has ever seen a key rate slow a profit margin with the same efficiency.

It will be objected that the Bank is only doing its job, and that inflation erodes the most modest households first. That is true, and it is precisely what makes the choice of instruments interesting: why should the pain of "cooling" be distributed downwards, when price controls or a windfall tax would aim elsewhere? These options are matters of political decision, not laws of nature, and they are not on the committee's table.

Catherine Mann's dissent, who wanted to hit twice as hard, is instructive on this point: the debate concerns the strength of the dose, never the identity of the patient. Watch this space: the next announced rise, and above all the data on real wages and corporate margins, which we await in order to judge on the evidence.