Rishi Sunak can fight recession risks with a cost of living support package
Less than three months after Russian troops moved across the border into Ukraine the economic implications of the war are gradually sinking in. There have been other conflicts since 1945 but it is hard to think of one that has had such a dramatic and sudden impact. The only real comparison is with the Yom Kippur war of 1973.
Support for Ukraine has been widespread in the west, among governments and the public, but only now are the consequences of sanctions and embargos starting to be felt. This week the US Federal Reserve and the Bank of England raised interest rates in the face of annual inflation rates heading towards 10%. The European Central Bank will follow suit in the months to come.
The threat of recession is obvious. Central banks say they are powerless to prevent rising global energy prices from pushing up the cost of living but think they can prevent high inflation becoming embedded. The former chancellor of the exchequer Norman Lamont once said higher unemployment was a “price worth paying” to get inflation under control, and that sentiment lives on.
Last year, central banks assumed inflationary pressure would be temporary. There would be bottlenecks as demand picked up as countries came out of lockdown and supply struggled to keep up, but any problems would soon go away. Analogies were drawn with the audience leaving a theatre at the end of a play: there is a crush at the exits but it doesn’t take long before everybody is out on the streets.
Actually, things were a bit more complex than that, with more pent-up demand resulting from the lack of spending opportunities during the coronavirus pandemic than central banks thought and more impaired supply chains. The imbalance between demand and supply has since been
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