I do feel sorry for the Bank of England’s monetary policy committee. Coming soon after Britain’s worst inflation for four decades, a Strait of Hormuz oil shock is its nightmare scenario. Dearer energy raises input costs, weakening real output growth and pushing up the price level. That leaves the Bank in a bind. Tighten policy to choke off the inflation burst and the MPC risks worsening the output squeeze, perhaps tipping the economy into recession. Ease money to support growth and it risks turning a short inflation burst into a prolonged one.

Given that Threadneedle Street cannot produce oil, many conclude the Bank should simply “look through” the shock entirely. Andrew Bailey, the governor, himself admitted the MPC “cannot influence global energy prices”. Yet markets, at time of writing, read the MPC’s analysis as pointing to two rate rises this year. Rupert Harrison of Pimco worries markets are “fighting the last war”, encouraged by the hawkish statements of the committee members. Surely the central bank should commit more clearly to just ignore the shock?

It is an argument I have made in the past, grounded in economic logic. And in a world where the Bank had kept economy-wide spending on a disciplined path, it would carry more weight. An oil shock would cause inflation to rise temporarily. Real growth would weaken. But the Bank would not need to panic or deepen the downturn.

The trouble is that the “look through it” logic is rarely spelt out in full. Under a framework where the Bank tolerates above-target inflation when supply worsens, it should also tolerate below-target inflation when supply improves. As Alan Taylor, one of the MPC’s external members, made clear, inflation would be “higher and then lower in the near term, but largely unchanged in the medium term”. The basic idea is simple: keep overall spending growing steadily and let inflation rise or fall as supply shocks occur.

And that is why Britain’s post-pandemic history matters so much. The Bank has not lived up to that implied framework. For too long, public debate has absorbed the Bank’s self-serving story that high inflation was merely a sequence of unfortunate supply shocks: Brexit, Covid and then the Ukraine war. Those relative price shocks undoubtedly weakened growth and pushed prices higher. But they were never the whole story.

Suppose the Bank had been trying to keep nominal spending on its 2010s path since the pandemic. Did it do a good job? Well, by the end of 2025, nominal GDP — total money spent on final goods and services — was actually almost 8 per cent above its pre-pandemic path. Real GDP, meanwhile, was about 7 per cent below trend.

In plain English: yes, Britain has suffered major supply-side weakness afflicting growth, and that helped raise the price level. But the Bank also allowed total spending to run far above trend at the same time. It is the combination that explains why consumer prices today are about 14.5 per cent higher than if inflation had remained at 2 per cent throughout. More than half of that “excess” reflects monetary policy allowing nominal spending to run too hot.

That is the real lesson of recent years: loose monetary policy turned some supply shocks into a prolonged general inflation. So I can forgive a bit of MPC over-correction today. If it had declared itself powerless and signalled unchanged policy even as ministers weighed yet more borrowing for energy-bill relief, it risked inflation expectations rising more sharply.

With a better recent record, the Bank might have credibly looked through this oil shock. But the MPC’s performance of late is less than stellar. It was only very recently that money spending growth returned to anything like a rate consistent with its inflation target. While the oil shock certainly came from abroad, the credibility problem making the MPC’s job harder was homegrown.