Sunday, October 02, 2022
They crashed the pound, but mustn't crash the economy
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt. Not to be reproduced without permission

You have to hand it to Liz Truss and Kwasi Kwarteng. In less than a month in office they have crashed the pound to a record low against the dollar, destroyed the credibility of UK fiscal policy, brought widespread predictions of a house-price crash and forced the Bank of England to step in with a major market intervention to head off a financial stability crisis. That was threatening something that Tory members and voters hold dear, their pension funds and the assets they hold.

These are world-class levels of ineptitude. In the same month that people across the world saw Britain at its best, with a superbly organised state funeral for the Queen, brilliantly filmed and broadcast by the BBC, we have seen a new administration revealed as a bunch of bungling amateurs. One was soft power. The other is daft power.

Before the chancellor’s “fiscal event” nine days ago, I wrote that what the government saw as shock and awe could well turn out to be shockingly awful. As the economist Jonathan Portes put it, with the classic line from the Italian Job: “You were only supposed to blow the bloody doors off.” Another economist, John Hawksworth, likened it to teenagers breaking into a nuclear power plant to “have some fun” with the fuel rods.

How do we get out of this confidence-destroying made-in-Downing Street mess? The first priority is to admit the errors. While the government and a tiny minority of frankly weird commentators want to blame everybody else, it is crystal clear what has happened. A government that thought it could ride roughshod over basic fiscal convention, having sacked the senior Treasury official who cut his teeth fighting crises, and refusing to call on the services of its own economic watchdog, the Office for Budget Responsibility (OBR), has been punished by the markets, as was inevitable, and we are all suffering the consequences. Promising further tax cuts, as Kwarteng did last weekend, was pouring petrol on the fire.

So it is essential to restore some fiscal credibility. Even an OBR forecast, which will eventually be published on November 23, may not do the trick if it is predicated on unrealistic projections for government spending. Already the talk is of “Austerity II” in which departmental budgets are not adjusted for the high inflation we are seeing and pensions and other benefits are not uprated in line with inflation next April. Let us see how that goes down when it coincides with the reduction in the 45 per cent top rate of income tax, also next April.

The government is said to be looking for efficiency savings to reduce public spending, an ambition always wheeled out at times of difficulty, but usually with little effect.

On the tax side, I suspect that as long as Truss is prime minister any reversal will be regarded by her as “over my dead body”. Stealth tax increases might be another matter. She may not last long as prime minister, and we have learned – again – that leaving the choice to a small number of Tory party members is dangerous, but another change of leader would hardly reinforce the UK’s reputation for stability. A change of government might.

Under this government, the best hope is outside its control. Gas prices have been highly volatile in recent weeks, falling from their highs in response to Europe’s success in filling reserves to see countries through the winter months and falling consumption. If they were to fall decisively it would significantly reduce the cost of the energy price freeze announced by Truss on September 8.

She told local radio listeners on Thursday that the freeze meant nobody would pay more than £2,500 a year for the next two years, though the amount, which in some cases will be much more than £2,500, depends on the type and size of property. Even so, the high cost of the package, and its equivalent for businesses, could come down from the estimated £150 billion or so – estimated by independent forecasters, not the government – if prices were to fall.

Sunday, September 25, 2022
Welcome to Kwasi's world of push me-pull you economics
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt. Not to be reproduced without permission

Readers with long memories may recall a time when chancellors would announce hikes in interest rates during their budget speeches. This, in the time before Bank of England independence, was usually when the economy needed some nasty medicine, so a rise in interest rates would typically be accompanied by tax hikes, and vice versa.

The past few days have seen something rather different. On Thursday the Bank of England increased Bank Rate from 1.75 to 2.25 per cent, its seventh in a row and the second half-point rise in succession. Until last month, the Bank had never raised by more than a quarter during the independence era, which dates back to 1997.

It could have been more. Three of the nine members of the Bank’s monetary policy committee (MPC) wanted to hike by three-quarters of a percentage point, 75 basis points. While not anticipating Friday’s maxi-budget from Kwasi Kwarteng, they said that the policy of freezing energy prices, at considerable cost to the public finances, “would add to demand pressure” and thus make the task of getting inflation back down even harder.

Then, on Friday, along came Kwasi with the biggest tax-cutting budget since Anthony Barber 50 years ago, according to the Institute for Fiscal Studies. Having leaked part of his statement on Thursday afternoon, revealing that his national insurance (NI) cut would come into force on November 6, a little earlier than expected, he then unveiled a lot more. The Bank would have been prepared for that, and the decision not to go ahead with next April’s planned rise in corporation tax, adding up to a combined £34 billion when fully in place.

More surprising was the other £11 billion of tax cuts, some bonkers, some provocative. Cutting stamp duty is the least sensible use of taxpayers’ money I can think of, at a time when house-price inflation is in double figures and residential transactions are holding up well.

Abolishing the 45 per cent additional rate of income tax – a legacy of the financial crisis – at the same time as lifting the cap on bankers’ bonuses was a combination that the Treasury’s Sir Humphrey, Sir Tom Scholar, would have described as “brave” if he had not been sacked. The 45p rate abolition, which I got wind of a couple of days before the announcement did not cost that much, roughly £2 billion a year, but is hugely symbolic. Together with the move on bankers’ bonuses, it is intended to boost immigration, of international bankers that is. There is still, of course, a higher income tax rate than 45 per cent in the system, the 60 per cent marginal rate that applies on income between £100,000 and £125,140.

Bringing forward a planned cut in income tax to 19p in then pound (from 20p) to April next year is an unashamedly political move but, in tax terms, entirely illogical. The Office of Tax Simplification is being abolished, which is perhaps just as well. Cutting the basic rate of income tax, always the obsession of chancellors from both parties, is a strange thing to do when income tax is being increased through the mechanism of freezing tax allowances and thresholds. Even so, bringing forward the income tax cut at a time when inflation is expected to be still close to double figures will boost demand at a time when the Bank is trying to constrain it.

This a curious state of affairs. You may be familiar with the Pushmi-Pullyu from Dr Dolittle, a strangle, llama-like figure with a head and shoulders at each end of its back. What we are seeing from the new prime minister and her chancellor is push me – pull you economics. The Bank is trying to restrain demand by raising interest rates, while the government is pumping it up with tax cuts and untargeted energy support.

As Lord Macpherson, the former Treasury permanent secretary, who has just seen his successor unceremoniously dismissed, put it: “Historically, the role of UK fiscal policy was to support monetary policy. Now it is to oppose monetary policy. Perhaps, that explains why the long-term cost of borrowing has risen …. We are already paying the price.”

Sunday, September 18, 2022
Rare good news as the misery index dips - but there's a long way to go
Posted by David Smith at 09:00 AM
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My regular column is available to subscribers on This is an excerpt. Not to be reproduced without permission

There has been some rare good news on the economy in recent days. Inflation fell for the first time since September last year, dipping from 10.1 to 9.9 per cent last month and ending a series of upside surprises. The unemployment rate also fell, from 3.8 to 3.6 per cent, pretty much as close to full employment as you can get, and the lowest since mid-1974. I shall dig a little deeper into the unemployment fall a little later, including a technical explanation of why it might have happened.

The misery index, invented by the late Arthur Okun, an eminent American economist, has thus fallen for the first time in a long while. It is the combination of the unemployment and inflation rates, and so is fractionally lower than a month ago but much higher than this time last year and, indeed for many months before that.

Okun also invented the “two successive quarters” definition of recession; gross domestic product (GDP) having to fall for two quarters in a row. As chairman of Lyndon Johnson’s Council of Economic Advisers, he was looking for a way to get LBJ off the hook after some bad economic news. It was a political contrivance and ultimately unnecessary, because LBJ pulled out of the 1968 presidential race. But it has stuck, though not in America, where declaring whether there is a recession or not is the responsibility of the National Bureau of Economic Research’s business cycle dating committee, which is not nearly as much fun as it sounds.

Anyway, the two-quarter definition may soon be tested in this country, depending on how much tomorrow’s bank holiday for the Queen’s state funeral reduces GDP. If that was all that is happening it would be an artificial recession, GDP having fallen fractionally in the second quarter, in which there was also an additional bank holiday. But the economy has clearly lost momentum and is flat at best, even without those special factors.

More on that in a moment, when I return to unemployment. Firstly, what about inflation? The dip in consumer price inflation was not the only bit of inflation good news. What is sometimes called “pipeline” inflation, for producer prices, also edged lower, though remains strikingly higher. Input price inflation, for raw materials and fuels, came down from 22.6 to 20.5 per cent, while output inflation – for prices charged – slipped from 17.1 to 16.1 per cent.

There may be further good news on inflation in the short term. The drop in petrol and diesel prices, the big reason for inflation’s fall last month, has gone further. In August, the average petrol price used by the Office for National Statistics was 175p a litre. The latest, according to the RAC, is 167p.

After that, we will discover that inflation has not yet peaked. The £2,500 energy price freeze level for the average household includes the £400 payment to households the new prime minister has inherited from her leadership rival Rishi Sunak. But that £400 will not be included in the consumer prices index, so energy prices will still be exerting an upward impact on inflation from October 1.
Businesses meanwhile are having to wait for their help.

Inflation will thus rise further over the autumn and winter. Optimists think it will not go much above 10 per cent, pessimists see the peak at closer to 12 per cent.

It is, however, possible to see the light at the end of the inflation tunnel. The “electricity, gas and other fuels” component of the consumer prices index is currently up 69.7 per cent on a year ago. By the autumn of next year, it will be close to zero, and overall inflation will be down to half, at most, its current rate of roughly 10 per cent. The public, I should say, is with ne on this. The latest Bank of England survey of inflation expectations for two and five years ahead shows that they have eased back from 3.4 to 3.2 per cent in two years’ time, and from 3.5 to 3.1 per cent in five years.

There is still pain to go through, with food prices rising at an annual rate of 13.4 per cent, and for the Bank – which is ready to raise interest rates aggressively again this week – “core” inflation is much too high at 6.3 per cent.
The UK and European governments are capping energy prices, and this will hold down measured inflation. Other inflationary pressures, it is assumed, will subside as aa result of economic slowdowns/recessions, partly brought about by higher interest rates, partly the squeeze on real incomes already in place.

Sunday, September 11, 2022
Just wanting a 2.5% growth rate won't make it happen
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt. Not to be reproduced without permission

You may have heard enough about the new government already. I call it that because, while it is the same party, it is very different to the one we had until last Tuesday. But bear with me, there are a couple of questions to address.

The first is the impact of the energy price freeze. I am accustomed to using the word bazooka to describe occasions when governments bring out the big guns in response to a crisis. But this very high-cost intervention, like those during the pandemic, takes us towards the Schwerer Gustav as a more appropriate analogy. This was the German heavy artillery – said to be the biggest conventional gun ever – used, though not that successfully, in WW2.

An energy-price freeze is a massive, if untargeted intervention, though so far it is a menu without official prices, in terms of cost. Many of those who condemned it as unrealistic when it was proposed by Sir Keith Starmer have now become great fans. It will bring down measured inflation and help stave off recession. You will remember I and others pointing out that when the Bank of England predicted a significant, five-quarter recession last month, it did not assume any further action from the government, as is its standard procedure. That action has arrived, and it is significant, though it will reduce rather than eliminate the pain for many households and firms.

As an indication of the impact on measured inflation, Goldman Sachs, which a few days ago was suggesting that inflation could peak at 22 per cent early next year, and which had a main forecast of a 14.8 per cent peak then, now thinks the peak will be 10.8 per cent in October.

I use the term “measured” inflation advisedly. As long as gas prices stay high – and there are reasons as I suggested the other day that they might not – this is no more a genuine reduction in inflation than when Denis Healey claimed in the 1970s to have cut inflation at a stroke by reducing VAT. All that is happening is that the inflation is being absorbed by taxpayers, at considerable cost. It remains to be seen how comfortable markets are with that cost. Analysts are already warning of further upward pressure on gilt yields and more sterling weakness. Perhaps paradoxically, they also think this will persuade the Bank of England to raise interest rates by more, not less.

In the meantime, let me turn to another issue, which is the new administration’s ambition to get the economy back up to 2.5 per cent growth, which the chancellor Kwasi Kwarteng reiterated at a meeting with business leaders shortly after taking up his post.

It is an ambition which sounds a bit geeky but which is very important. The economy’s trend growth rate is what determines our prosperity and 2.5 per cent is an interesting number. It is, in fact, exactly the average growth rate for the UK economy since 1949, which is as far back as the Office for National Statistics has formal and reliable data for.

That 2.5 per cent average, however, reflects different experiences for different time periods. Growth was strong in the second half of the 20th century, and the UK outperformed most competitors after joining the European economic Community in 1973. But growth this century has been slower, averaging just 1.8 per cent, and has been particularly weak since the financial crisis, when the average has been just 1 per cent.

Sunday, September 04, 2022
Slump in sterling and gilts reveals markets' fears for the UK
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt. Not to be reproduced without permission

We’ve all done it, and you might describe it as one of those very British problems. You are talking, in hushed tones, and not necessarily unkindly, about somebody in the corner of the room who is hard of hearing. Then suddenly, in an unexpectedly loud voice, they say: “I can hear you; you know.”

I have been thinking about this over the past few weeks, when the Tory leadership candidates, and in particular the frontrunner Liz Truss, have been pitching to the party’s membership about what they want to do to the Bank of England and the Treasury, alongside plans for unfunded tax cuts and spending commitments. For Truss, economic policy appears to consist of telling the Tory membership what it wants to hear.

But there is another audience, which reads the papers, watches TV and listen to the radio, the financial markets. And they, though not the target for the pitch, are saying: “We can hear you; you know.”

It reminds me a bit of some of the episodes of the past few years, when cunning plans to catch the EU out with the latest Brexit negotiating wheeze are briefed to the papers here, on the assumption that Johnny Foreigner in Brussels is incapable of reading them.

August was a cruel month for the pound, its worst for six years against the dollar and pretty ropey against a basket of currencies. Six years ago, of course, it plunged on the referendum result. In the middle of the week there was a neat symmetry about sterling’s exchange rate against both the dollar and euro. Both were at 1.16; $1.16 and €1.16, both massively below what used to be their long-run averages.

People notice the weak pound, directly when they travel and indirectly via higher prices for imports. They may not notice something which is as important, the performance of UK government bonds, gilts. August was also the worst month for a long time for them, with the biggest sell-off since 1994. A sell-off in gilts means a rise in the yield, or interest rate, on them, which in time feeds through to an increase in the cost of government borrowing.

During August, the yield on two-year gilts rose above 3 per cent for the first time since the financial crisis, while 10-year gilt yields rose to their highest for eight years.

Not all of this can be put down to Truss’s economic policy musings on the campaign trail, but judging from some of the market commentary I have been looking at, quite a lot of it can.

Bill Blain, a market veteran who is strategist for Shard Capital, has a big following with his “Morning Porridge” daily notes. One follower is the former chancellor Sajid Javid, curiously a Truss supporter. In fact, I met him at a small breakfast hosted by Javid at 11 Downing Street, two chancellors ago.

A couple of days ago, Blain issued a stark warning. “The UK is at risk of breaking its ‘virtuous sovereign trinity’ of stable politics, currency and bond markets,” he wrote. “Collapsing confidence in politics to stem the slide in sterling and thus gilts, could see the UK stumble into a sovereign financial crisis sooner than we think possible.”
You will remember, after the financial crisis, the then chancellor George Osborne was determined to keep the markets onside and the UK’s sovereign debt ratings intact, to avoid a sell-off in gilts.

Lord Macpherson, Treasury permanent secretary at the time, observed the other day that the combination of a falling pound and rising gilt yields is his former department’s “worst nightmare”. Truss wants to shake-up the Treasury, the Bank and launch her first package of economic measures without an accompanying assessment from the government’s economic and fiscal watchdog, the Office for Budget Responsibility (OBR). The risk is that we are entering a period in which crisis management will be the norm.

Sunday, August 28, 2022
Debt can only explode when one crisis follows another
Posted by David Smith at 09:00 AM
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My regular column is available to subscribers on This is an excerpt. Not to be reproduced without permission

In the summer of 2021, just over a year ago, I had a long chat with a senior Treasury official – OK it was the former chancellor – who was worried about what the future might bring. At the time, there was a much-quoted estimate from the Office for Budget Responsibility (OBR) doing, which was that a sustained increase of a percentage point in inflation and interest rates would add £20 billion to the government’s annual debt interest bill.

Back then, with Bank Rate stuck at 0.1 per cent, as it had been since March 2020, gilt (UK government bond) yields less than 1 per cent and inflation in July 2021 bang on target at 2 per cent, there did not seem to be too much to worry about.

But Rishi Sunak was concerned, and I owe him, with hindsight, an apology. A few months earlier, at the end of November 2020, in unveiling a one-year spending review, he used the phrase: “Our economic emergency has only just begun.” I and others criticised him for laying it on a bit thick. The economy had bounced back sharply from its slump during the first lockdown in the spring of 2020 and appeared to be coping well with the second lockdown then under way. The prospect was of a strong post-pandemic recovery in 2021.

However, while he could not have predicted the Russian invasion of Ukraine and its consequences, he was right about the emergency. The interlude between end of pandemic restrictions and this cost-of-living and cost-of-doing-business crisis was brief. From the end of the third lockdown in early 2021 to the Russian invasion of Ukraine in February 2022 was less than 12 months. “Normality” was brief; one crisis quickly morphed into another.

It is hard to overstate the seriousness of the current crisis, following Friday’s announcement of the energy price cap for the final quarter of the year. Normally, though it may not always feel like it, household incomes are protected during difficult times for the economy. Real household incomes per head held up well during the financial crisis more than a decade ago, only falling back, but not by much, in the early austerity years after 2010 and after the 2016 referendum.

They also held up well during the recession of the early 1990s and, thanks to large amounts of government support, during the pandemic. That is why the fall in real incomes in prospect now is the biggest since records began at the start of 1955. This is indeed serious.

So it is for business. When the British Chambers of Commerce and others call for Covid-style support for firms during this energy crisis, as this newspaper did last weekend, they know what they are talking about. The increase in energy costs faced by many businesses, notably energy-intensive firms and small and medium-sized businesses (SMEs) represents the difference between survival and closure. Lockdowns are a thing of the past but many, particularly in hospitality and retail, are operating on a partial lockdown basis because of staff shortages and rising energy costs.

Crises, and recessions, are not like London buses. They are not supposed to come so quickly after one another. You will recall that after the global financial crisis, a new one was predicted virtually every year.

Sunday, August 21, 2022
I'm sorry, but both of these have failed the audition
Posted by David Smith at 09:00 AM
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My regular column is available to subscribers on This is an excerpt. Not to be reproduced without permission

Never one to pass up the opportunity of a popular culture reference, albeit one that is several decades old, the late John Lennon’s words at the end of the Beatles last live concert – on the rooftop of the Apple (no, not that one) headquarters in London’s Savile Row, were: “I hope we passed the audition.”

I have been thinking quite a lot about that as we have watched the two candidates to be Britain’s next prime minister auditioning for the role. I don’t want to leave you in suspense, particularly since you will have seen the headline, so I can tell you now. No, neither has passed the audition.

Don’t stop reading now because there is plenty more to say. And, I have to tell you, this is not the smartest of career moves. The sensible thing would be to laud Liz Truss, as many Tory MPs and would-be ministers have done since she established herself as favourite, with perhaps just a side-bet of applause for Rishi Sunak. But I have to tell it as it is, so here goes.

Let me start with the frontrunner. Some people have begun to describe her approach as Trussonomics. I think that is going much too far, for I have struggled to detect much, if any, economics in her approach. It pains me to hear people I like and respect, who happen to support her, describing her as having a credible plan for growth.

There is no such plan, save from returning one part of the tax burden to where it was in 2019, when the UK was a weakly growing economy. Income tax is still scheduled to rise, thanks to the four-year freezing of allowances and thresholds, as will the national insurance (NI) burden for similar reasons from April next year even if the NI rate rise in reversed.

Using the expression “supply-side” is not a strategy for growth, and neither are unfunded tax cuts. I hate to say it, given that there was so much wrong with everything else he proposed, but Jeremy Corbyn’s “green new deal” was a more coherent growth plan than anything she has yet come up with.

Vague noises about revisiting the Bank of England’s mandate or establishing a new economic unit in 10 Downing Street, do not cut much ice. Changing the Treasury’s mission to one of growth is also very familiar territory.

Truss is fond of criticising her opponent for “Gordon Brown economics”. Brown made the Bank independent 25 years ago not just to improve the trade-off between inflation and growth/unemployment, which for most of the past quarter of a century it has done, but also so the Treasury could become more of an economics ministry, focused on improving the UK’s long-term performance.

He, the last chancellor to preside over a growth rate for which his successors would give their eye teeth, concentrated on productivity even when it was not obvious that we faced a crisis. On his watch, the productivity gap between the UK and competitor countries narrowed.

Truss, I have to say, comes over a novice on these matters. We can only hope that it is deliberate, and that she is not as economically challenged as she sounds.

Sunak, her rival, has however also been a disappointment during this contest. The economy should have been his strongest card, but he started on the back foot. Before his spring statement in March, I and others urged him to delay the NI rise because of the cost-of-living crisis but, having secured agreement from Boris Johnson to do it, he was determined not to lose the moment.

His claim that the furlough scheme helped limit the pandemic rise in unemployment is certainly true. But many older voters, including some Tory members, did not like the idea of people being paid by the government to sit at home doing nothing, as I know from my email inbox. Hence, I presume, Truss’s clumsy “no handouts” comments in respect of the intensifying cost of living crisis.

Sunak has managed to snooker himself during the campaign, and not just by thinking it was sensible for his wife to maintain her non-dom tax status while he was chancellor..

When inflation is already here, warning that Truss’s tax policies will mean yet higher inflation, which it only marginally might, was not clever. Citing Professor Patrick Minford, a Truss-supporting economist, saying that her tax policies would lead to a 7 per cent Bank rate, was not very clever either. Many older voters would love higher rates on their savings. As it is, Minford has strongly denied to me, and in a letter published in The Times, that he said any such thing.

His attack on the Truss tax policies should always have been on affordability and the magic money tree aspects of it, not inflation. Truss’s Johnson-like “cakeism”, simultaneously promising to cut taxes and increase public spending, and debt, something that normally would resonate to Tory members and the wider electorate, should have been his focus. Public spending will have to be increased furthers, as the Institute for Fiscal Studies points out, to avoid unintended austerity arising from the effects of inflation on departmental cash plans.

As it is, if she were to win, we could find ourselves in a worse position than under Johnson. Though he had to go for repeatedly demanding the office of prime minister, his cakeism was at least balanced by Sunak’s steadying hand at the Treasury. The loyalist that Truss appoints as chancellor, assuming she wins, is unlikely to show such resistance.

It has not just been Tweedledum and Tweedledee in this leadership contest. Both are guilty of one of the oldest deceptions in the book, that that there is a bonfire of red tape, most of it emanating from the EU, to set alight. The Daily Express wrote that “Brexit wonder woman” Truss was going to do so.

You may think that this sounds rather familiar, because it is. Boris Johnson, holding a kipper aloft, as in a fish, promised a bonfire of red tape three years ago and such a pledge was embodied in Queen’s speeches under his government. He was following a tried and trusted route, favoured by many politicians, but such conflagrations never happen.

Sunday, August 07, 2022
Looking for a light at the end of a very dark tunnel
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt. Not to be reproduced without permission

There was a time when “not for those of a nervous disposition” was the standard warning on particularly scary films, often starring the late Vincent Price, or even books. It could easily have been applied to the Bank of England’s latest projections, or maybe Edvard Munch’s The Scream. The Bank’s latest monetary policy report, published alongside its decision to raise Bank Rate from 1.25 to 1.75 per cent on Thursday, was a horror story.

The rate rise, the biggest in 25 years of independence, was expected, and anticipated here last week. The new news was the Bank’s deep gloom about the economy, with inflation peaking at more than 13 per cent later this year and still being at 9.5 per cent in roughly a year’s time, the economy entering a five-quarter recession at the end of this year and the unemployment rate rising from 3.8 to 6.3 per cent over the next three years.

This would be as the Bank made clear, a Putin recession, brought about by a near-doubling of wholesale gas prices since May, because of Russia’s restriction of gas supplies to Europe, with the threat of more to come.

A recession is not inevitable, a I discussed here last week, and the Bank has different scenarios depending on what happens to energy prices. But another big price shock is inevitable this autumn.

The Bank does not do gloom on this scale lightly. Out of interest I looked back to what it was saying in its quarterly reports in 2008. In May and August, it expected a slowdown, but not a recession. Only in November, after the collapse of Lehman Brothers and the bailout of much of the UK banking system, did it recognise the inevitable.

As the Bank said on Thursday, things could turn out either worse or better than it now expects. Though it does not use the phrase, “slumpflation” has become a better description of the outlook it expects than stagflation. Though he would not be drawn on the Tory leadership contest, the noises off from the Truss campaign about Bank independence do not make the job of Andrew Bailey, the governor, any easier. More on that soon.

It would be very easy at this stage to get overwhelmed by the gloom. But, as plausible as the Bank’s forecasts of very high inflation later this year and well into next, so are its predictions that in a couple of years inflation will be at or below its 2 per cent target and in three years below 1 pe cent and skirting close to deflationary territory; falling prices. This was why one member of the Bank’s monetary policy committee (MPC), Silvana Tenreyro, favoured only a quarter-point rise last week.

I do not diminish the problems that we now face, particularly low-income households and energy-intensive firms. Each day brings new horrors when it comes to the likely path of energy bills in the autumn, and the cost-of-living crisis is bearing down on the economy. The decision to allow the holidaying Boris Johnson to continue as prime minister until his successor is chosen has created a vacuum in government at a time of intense domestic pressure on the economy and worrying international tensions.