Central bankers turned hawkish last year as inflation kept increasing to dangerous levels. They have started raising interest rates and some of them have done so several times, although inflation keeps increasing. They are hammering the point that they are “doing their job” when it comes to battling against inflation.

However, the irony is that they barely have any influence in the debate, especially when the lack of fiscal inaction leads to the increase in Oil prices and all prices in general. Bank of England has hiked rates 5 times so far, but this is not something that the BOE can control. And neither can they stop supply chain bottlenecks, surging energy prices, and geopolitical issues involving sanctions.

It is the illusion that they are trying to sell but sadly, they might very well have to admit that all of this was for nothing if the economy starts to crack under the pressure of everything else. And last week’s UK CPI (consumer price index) numbers which surged further to 9% while the Services PMI showed a major slowdown in April, are certainly going to pose such a dilemma to the BOE.

UK May Flash Services PMI Report

• May flash services PMI 51.8 points vs 57.3 expected
• April services were 58.9 points
• Manufacturing PMI 54.6 points vs 55.1 expected
• Prior manufacturing was 55.8 points
• Composite PMI 51.8 points vs 56.5 expected
• Prior composite was 58.2 points

That’s a stark miss on estimates as UK services activity slumps to a 15-month low with the cost-of-living crisis worsening in May. Of note, escalating inflationary pressures and heightened geopolitical uncertainty acted as constraints on demand. A rapid acceleration in input cost inflation across the service economy was observed leading to concerns about squeezed margins and weaker order books, resulting in a considerable drop in business expectations for the year ahead.

S&P Global Notes:

“The UK PMI survey data signal a severe slowing in the rate of economic growth in May, with forward-looking indicators hinting that worse is to come. Meanwhile, the inflation picture has worsened as the rate of increase of companies’ costs hit yet another all-time high.

“The survey data therefore point to the economy almost grinding to a halt as inflationary pressure rises to unprecedented levels.

“The tailwind from the reopening of the economy has faded, having been overcome by headwinds of soaring prices, supply delays, labour shortages and increasingly gloomy prospects. Companies cite increasingly cautious moods among households and business customers, linked to the cost-of-living crisis, Brexit, rising interest rates, China’s lockdowns and the war in Ukraine.

“There are some signs that the rate of inflation could soon peak, with companies reporting price resistance from customers, and it is likely that the slowing in demand will help pull prices down in coming months. However, the latest data indicate a heightened risk of the economy falling into recession as the Bank of England fights to control inflation.”

It is easy to point fingers and scrutinize the BOE for such “mismanagement” but the fact is that central banks have a mandate to follow and the less talked about point is how politicised every institution has become these days. No policymaker wants to burn bridges and none of them are willing to say what needs to be said.

That being the central bank toolkit is not the right one to be dealing with the current inflation problem. The monetary policy cannot help now. Governments are more well-equipped and should be leading the initiative. Yet, not one policymaker has come out to point that out in a meaningful way.

I think we all can get that if central banks don’t act, the problem might be worse. But please, spare us the illusion. It’s sad that integrity and central banking are two things that may forever now be mutually exclusive.