Am I alone in finding the Bank of England’s inflation narrative rather confusing? The monetary policy committee (MPC) recently voted 6–3 to keep the Bank rate at 5.25 per cent and continue quantitative tightening. Monetarists had warned that broad money, the amount of money circulating in the economy, had contracted this year, suggesting policy was too tight and could deliver a recession and below-target inflation within 18 months. Yet the MPC stood firm, viewing a tight-money spending squeeze as essential to reduce inflation from 6.7 per cent to its 2 per cent target.

Peruse the Bank’s website, however, and a section titled “What caused high inflation in the UK?” offers a different perspective. High inflation was caused by the pandemic, the war in Ukraine and workers leaving the labour market, it suggests. These “three shocks” raised energy and food prices, as well as wages, pushing up other prices. There’s no mention of any Bank missteps on money playing a role.

The idea that the Bank did not create inflation but is crucial to fighting it seems self-serving. The pandemic and Ukraine war undoubtedly harmed our economy’s capacity, raising prices. But if supply shocks alone caused high inflation, this impact would have been very short-lived. Andrew Bailey, the governor, might have reasonably argued against tightening policy at all, deeming it unnecessary and potentially damaging.

He quickly abandoned that line because the Bank’s initial Shaggy defence (“it wasn’t me”) was simply not credible. Nominal, or money, GDP was 4.8 per cent over its pre-pandemic trend by the middle of this year, clear evidence that a large chunk of the inflation we’ve seen came from too much stimulus pushing up economy-wide spending.

An honest account of this is critical because some analysts are overcomplicating what needs to happen to get inflation back down. There’s been talk, for example, of reviving a 1982 policy idea by the economists Richard Jackman and Richard Layard for a tax on wage increases, echoing 1970s income policies.

Championed by Sushil Wadhwani, a former MPC member who is on the chancellor’s council of economic advisers, the government would set a baseline of a 3 per cent rise in hourly earnings per year, above which any further increase would be taxed at 100 per cent. If an employer wanted to raise a worker’s pay by 5 per cent it would cost them the equivalent to a 7 per cent increase. He suggests this penalty would cool expectations of inflation, helping deliver the Bank’s target without triggering more unemployment.

This tax — less of a wage ceiling, more a “canopy” — ignores that wages often rise not solely because of inflation but due to changes in job markets and employee performance. Firms rewarding rising productivity or trying to attract or retain staff through raising pay would be hit with a hefty tax, creating huge labour market distortions.

To remain competitive while avoiding the tax, affected firms would jack up non-wage benefits or shift work to “self-employed” contractors. Policing evasion would necessitate a large government bureaucracy, with compliance a thankless task in a world with individual contracts rather than collective bargaining. That’s before we address other complexities: would there be tax rebates for earnings increases below 3 per cent? What about bonuses? Promotions?

The policy’s critical flaw, of course, is that it targets an inflation symptom — wage growth — rather than the real culprit: excess money. If you want to lower inflation expectations credibly, you ultimately have to set a monetary policy consistent with getting the expectations you want. You can fiddle with price controls and taxes all you like, but that doesn’t solve the underlying issue if there’s been excess money; it merely suppresses monetary inflation from being seen in prices until the tax is removed.

One would like to think, observing the Bank’s newfound inflation-fighting toughness, the government wouldn’t seriously consider such a proposal. However, given the Bank and government continue to downplay money’s role in driving the inflation, can we be confident such a policy is off the table?