Thread by @t0nyyates

The cost of living/energy crisis seems to generate some confusion. Short thread.

1. There's nothing the BoE could do about this. Even if it had had secret foresight of what would happen to energy prices, and set very tight monetary policy a long time ago to make sure that other prices fell to compensate, eliminating the inflation, it would still hurt.

2. The rise in energy prices is, fundamentally, a fall in our real standard of living; the cost of what we would like to consume relative to the worth of what we can produce and sell to exchange for it.

3. Even if the BoE had kept the price level constant, we'd all stilll feel the impoverishment of the increase in energy prices. [And we'd have experienced a recession at the same time, the inevitable consequence of tighter policy that would have kept prices constant].

4. The government can't shield all of us, forever, from this fall in our real standard of living caused by the increase in energy prices.

5. If the rise is temporary, the govt can borrow, and shield some or all of us from the temporary rise right now, and get some or all of us or our sucessors to pay back the debt in the future.

6. If the price rise is permanent, the govt doesn't have this option. It could delay the hit to us all, or some of us, but this will mean paying even more in the future.

7. The govt can do redistribution - raising taxes to pay for energy subsidies or benefit increases - such that some of us face an even larger fall in our standard of living so that others on lower incomes are shielded either entirely or in part.

8. To the extent that the energy price rise is just a rise in the rents our local energy producing companies extract from us [rents in the sense of unearned excess profits] the govt could simply take those rents after the event and redistribute them, or ban the price rises.

9. To the extent that the price rise comes from fluctuations in global rents, then you'd need global government coordination to do a global version of that [which isn't happening because some of the producers *are* governments].

10. To the extent that the energy price level rise is just a product of global demand and supply for energy - this leaves us where the thread started, pondering how best to weather, but not being able to avoid, the fall in our living standards.

11. Some of the criticism of the govt 'look, you idiots, how did you let the cost of living go up?!' isn't fair. They don't control the fundemantals to that extent, or over anything except a very long time horizon.

12. Some is fair: are you going to shield anyone from this, and if so, by how much, and for how long? It's fair to have answers to these questions so people can plan.

13. There's also reasonable criticism of our longer term energy policy. The lack of gas storage to ride out temporary spikes [won't help with permanent increases of course]. The failure to build more nuclear power stations [not cheap either though]....

.... and the failure not to exploit the extraordinary low interest rates to borrow to expand renewables capacity faster; and to invest in home insulation.

....there are also issues around allowing under-capitalised energy suppliers into the market, and the energy price cap. Disruptive though those failures were, addressing them won't solve the underlying problem.

Good point made by @meetun in replies: point 9 above: global rent redistribution isn't happening regardless of whether govts are energy producers or not. Too difficult to orchestrate given geopolitical differences and other distributional concerns.

14. Although the BoE can't sort out the cost of energy/living crisis, it does pose a dilemma for it, and you can hear it's institutional cogs whirring through all the arguments, as it has done many times before.

15. There's the upward pressure on inflation; if this is sufficiently short lived [ie shorter than the time taken for monetary policy to have an effect], it would ideally ignore that entirely. Provided inflation expectations don't move / people worry the BoE has lost control.

16. And there's the worry that the cost of living rise itself will cause demand for other goods and services to fall, perhaps triggering falls in employment. Depending on how temporary the energy price rise is, and is expected to be.