Is United Kingdom the canary in the coal mine?
Pretending monetary policy alone can curb inflation is a dangerous path
The latest U.K. inflation data are a cold shower for Rishi Sunak.
Inflation has fallen somewhat driven by the dramatic reversal of natural gas prices which had reached the equivalent of $500 U.S. a barrel of oil on a BTU equivalent basis during the early days of the 2022 winter only to fall back to Earth as a warm winter offset the severe shortages of gas arising from both the Ukraine war sanctions and the unwillingness of the climate nutters in Whitehall to develop the massive natural gas reserves under the U.K. in enormous share formations. The result is that inflation remains sticky and yesterday’s print well above wishful forecasts.
This clip from a Bloomberg article published this morning must have made Rishi Sunak shudder with the Bank of England noting that their favorite inflation gauge is at a 31-year high.
Sunak’s Conservative government policies are closer to those of the Biden Democrats than to anything remotely resembling traditional conservative values. His addiction to the specious ‘climate change’ narrative may buy votes but it won’t alter the course of nature and his policies will impoverish many Brits.
Like the United States Fed, the Bank of England policies are doomed to failure for ignoring the long-established Taylor Rule for central bank rates. With inflation at 8.7%, a central bank rate capable of any meaningful impact on future inflation would be in double digits under the Taylor Rule (the Taylor Rule is set out in my earlier article on Jerome Powell’s policies, and is just as applicable to those of Andrew Bailey).
Financial markets aren’t buying the Sunak policies any more than I am. Rates on “Gilts” are rising quickly and approaching the level of the 2022 “Gilt Crisis”.
Inflation is rising despite lower energy costs so Sunak can’t blame the war in Ukraine for the current dilemma. In a few months, 2023 will return to winter and if it is cold the shortage of fossil fuels with return to Europe with a vengeance and inflation may once again surge into double digit rates. Sure, another warm winter may sweep the problem ahead another year or even two, but the deepening shortage of fossil fuels will sooner or later have its inescapable impact on both energy prices and overall inflation not only in United Kingdom and Europe but also worldwide.
The problems facing Sunak are coming to North America as Biden and Trudeau keep doubling down on foolish “climate change” policies. Biden’s stealth plan to effectively ban natural gas cookstoves is more evidence of silliness on the left. Making everyone use electric power to cook will increase, not reduce, consumpttion of natural gas - converting natural gas to electricity and transporting it to millions of stove tops will suffer the energy losses inherent in the concept of entropy and the gas consumption will move upstream to power generation in amounts necessarily greater than having the natural gas converted to heat at the stovetop. One conversion always sees less energy lost than two or more - an inevitable outcome of laws of physics. It seems left wing governments love to enact laws that restrict personal freedom but can’t comprehend the laws of physics.
My prediction - a cold winter will precipitate a financial crisis in the United Kingdom, even an economic collapse. This outcome has all the elements of the fabled Irish curse “may you get your wish” as attempts to lower global temperatures run into the wall of colder winters and the related surge in demand for fossil fuels. Of course, colder winters have nothing to do with CO2 emissions and will happen from time to time as natural climate change continues to confound climate nutters who attribute every bad hair day to fossil fuel emissions.
The danger of economic collapse flows from two related problems. First, a tepid effort to curb inflation with policy rates that are half of the level implied by the Taylor Rule, and second, failure to encourage rapid increases in fossil fuel output to balance energy markets that otherwise will fuel even higher inflation.
The outlook is not promising.