WATCHING the Bank of England Governor this week, one thing which really struck home was the contrast between his awareness of the greater “hurt” to the “least well-off” from the inflation shock and the Chancellor’s attitude a few days earlier.

Attention understandably focused on Andrew Bailey’s warning of “an historic shock” to real incomes and comparisons with the 1970s energy price crisis in an interview with the Brussels-based Bruegel think-tank on Monday.

However, while the Bank Governor’s comments on this front should make anyone as yet unaware of the scale of the UK’s cost-of-living crisis sit up and take note, Mr Bailey’s emphasis of the importance of not forgetting the particular impact of high inflation on the “least well-off” was both considered and noteworthy.

It was good to hear this issue being raised by a senior policymaker, and even more so given how out of touch Chancellor Rishi Sunak and other members of the Boris Johnson administration appear on this front.

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One of the striking aspects of Mr Sunak’s Spring Statement last week was a lack of meaningful measures to help households facing the greatest financial struggles.

To take just one example, nothing was done to address the enormous real-terms squeeze on the incomes of huge numbers of households caused by the rise in benefits for the new financial year lagging dramatically the prevailing inflation rate.

The UK Government has, of course, also withdrawn the £20 a week uplift in universal credit put in place to help people through the pandemic.

And it is still showing a complete lack of recognition of the scale of the problem for millions of households facing huge rises in electricity and gas bills.

Regulator Ofgem in February announced a £693 per year or 54% hike in the energy price cap for a typical dual fuel customer, which comes into effect today. The UK Government has come up with what it seems to think is a generous support package. This includes a £150 boost for households qualifying for the council tax reduction measure. There is also a £200 “discount”, but this is actually a loan because it must be paid back over five years. It is a most inadequate response.

Laying out the scale of the current inflation problem and the challenges in dealing with it, Mr Bailey said: “In the UK, and indeed elsewhere, we are very much facing a very large shock to aggregate real income and spending. That is not something that we have a policy tool that can make it go away. It’s coming through energy prices…imported goods and some foods…

“Inflation measures are well above target. Unfortunately, I think it is best to think that there is some more to come on that front, particularly from energy prices which are the major driver of inflation at the moment. So there is more to come reflecting of course recent events with the Russian invasion of Ukraine.”

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The Bank of England forecast in March that annual UK consumer prices index inflation, which had by February risen to 6.2 per cent from just 0.4% a year earlier, would climb to about 8% during the second quarter. And the Bank warned inflation could go higher later in the year.

Mr Bailey on Monday provided some dismal but important historical context around the UK’s cost-of-living crisis.

He said: “And just to put this into a bit of perspective, this really is an historic shock to real incomes. One of the things we’ve looked at in the context of the UK…in terms of energy prices is that we think that compared to any single year in the 1970s…the shock from energy prices this year will be larger than any single year in the 1970s. Now the caveat is that the 1970s had a succession of years and we very much hope that will not be the case now so I will add that caveat. But as a single year this is a very, very big shock.”

Mr Bailey cited some positives.

He said: “We are entering this very difficult period with stronger economic activity, stronger than we had expected.

“We also have a very tight labour market and we’ve had a build-up of unexpected saving during the Covid period. These developments are sustaining activity further into the real income shock than probably otherwise we would expect.”

He then went on to flag two points to illustrate “important explanations of what’s going on”.

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Mr Bailey said: “The starting point if you like for this difficult period we are going through does I think illustrate what has been an effective period for economic policy in terms of the response to Covid.”

However, he added: “The second thing I would say...and I think this is a very important thing to bear in mind is…that the benefits – I will just come back to the point about unexpected saving for instance for a moment – are not evenly distributed across the economy and inflation hurts the least well-off the hardest. The least well-off have got, you know, the least benefit from the saving build-up and they are most exposed to inflation particularly when it’s so concentrated in energy markets because their consumption basket has a much higher proportion of energy in it. So it’s important we don’t forget that.”

It is good to hear Mr Bailey describe this second point as a “very important thing to bear in mind”.

And UK Government ministers have a duty to give this crucial issue proper thought.

It is surely only right from a societal perspective that those least able to cope with the surge in inflation are helped. Many of these people, it is worth noting, will have been on the front line during the pandemic, in crucial but not well-paid jobs.

There are also economic considerations. A sharp fall in the real incomes of those people who have to spend all or the vast bulk of their money to live can be expected to weigh heavily on demand and prove a drag on growth.

Mr Bailey noted the Bank’s expectation that inflation would “cause growth in demand to slow”, adding: “We are beginning to see the evidence of that in both consumer and business surveys.”

He flagged the Bank’s expectation that “this pressure on demand will weigh down on domestically generated inflation, other things equal”, adding: “So, for that reason, we do expect inflation to return to target two years or so out from now.”

Mulling what it all means for interest rates, which have been raised from a record low of 0.1% late last year to 0.75%, Mr Bailey said: “What does it mean for monetary policy? We are facing a very big shock by any historical standard. We have got a very large trade-off between inflation and output activity, the two moving in opposite directions. There is a very high level of uncertainty. We’ve got a pandemic followed by a European war. In any scale, that is a very difficult position to be in for policy. The task we have is clear but it’s hard but we will of course stick to it.”

He added: “In our case, it’s appropriate to tighten policy in these circumstances but we do so recognising the uncertainty – that there are...risks to the outlook for inflation on both sides. The point I want to make here is that in these circumstances giving guidance on policy…looking forwards should recognise the uncertainty we face and the risks we face. And it’s really with that in mind that we changed our language at our last meeting to state that some further modest tightening may be appropriate rather than is likely to be appropriate as we had used before. That is a reflection and a recognition of the level of uncertainty and the risks we face.”

In times of uncertainty and strife, people need a helping hand. Such support is most important for the least well-off, who are, as Mr Bailey points out, having to endure greater pain.

Sadly, from Mr Sunak’s performance last week, it looks as if the Johnson administration will not be riding to the rescue of those most in need.