This is despite the fact that the Bank is at risk of going broke because of the very Quantitative Easing (QE) programme it pursued over the past decade. In other words, we are about to enable, with no public debate, the largest self-licking ice cream cone the country has ever seen.

In the event of the Bank going broke, a bailout would be underwritten by a letter sent by the then-Chancellor Alistair Darling to then-Bank of England governor Mervyn King in the heady days of 2009. This document enabled a so-called Asset Purchase Facility to help the Bank clean up the mess left over from the 2008 financial crisis. Yet since the letter can be read as open-ended, the current governor Andrew Bailey has said that it can be used again if the Bank goes broke.

Indeed, to some extent this technique is already being used: public borrowing figures suggest that £9.7 billion have been sent from the Treasury to the Bank. And the Bank is already short on funds to shore up its internal operations. While its current stance is that it will not ask the Treasury to backstop these losses, given recent history of mission creep in a crisis situation, this could change in a pinch.

This follows on from changes made by the Financial Services and Markets Act this year, which allow the Bank of England to raise a levy on private banks in Britain to fund its operations. In the cold light of day, however, the levy looks suspiciously like a tax and raises the question of whether the Bank of England is taking on quasi-governmental powers.

To better understand these developments, we must return to the chaos of March 2009. The global economy was reeling from the effects of the financial crisis and the recession that followed. Economists were terrified that we might be headed for a replay of the Great Depression, and so took on an attitude of “whatever it takes”. The Bank of England, like other central banks in the developed world, committed to a policy of Quantitative Easing (QE). This entailed creating enormous amounts of (electronic) money and flooding the banking system with it. Technically speaking, it meant buying eye-watering amounts of government debt from the private banks. Since the size of government debt and its interest rate are inversely related, interest rates went to the floor. The hope was that this would spur private-sector lending.

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Did it work? Well, the old joke — that if you ask a roomful of economists a question, you’ll end up with a roomful of different answers — certainly applies here. There are still some defenders of QE who claim that it saved the economy. A more cynical reading would be that it simply juiced asset markets and generated enormous financial bubbles in everything from stocks to bonds to classic cars and Rolex watches. It is the unwinding of these bubbles that is making the Bank of England’s own financial situation precarious.

After all, having bought this debt, the Bank was saddled with it. So, when we saw an outburst of inflation in the past few months and the Bank moved to raise interest rates, it had to start flooding the market with this debt. The price of the debt duly fell, and the Bank realised that it was haemorrhaging losses on its debt portfolio.

The obvious question is: did the Bank not factor in this possibility when it engaged in the QE programme in the first place? My guess is that they did not. The rush to enact it was driven by fear and more than a touch of hysteria. Economists at the time really had convinced themselves that the developed economies would never see inflation again.

Of course, those in charge at the Bank would no doubt prefer that this is not discussed. They will claim that they did their best in bad circumstances. And this is no doubt true. But it does raise questions about the growing closeness between central banks and financial markets. When I worked in private asset management, a friend at one of the big investment banks joked with me that we were simply overpaid civil servants. He was alluding to the fact that capital allocation by private markets, which should be seeking out the most profitable ventures in the real economy, was increasingly becoming a Punch and Judy show — with investment managers playing the role of puppets and the central bankers pulling the strings.

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The result of this dubious use of monetary policy is now bearing fruit: paradoxically handing the Bank of England more, not less power, further entwining the Bank with the markets. None of this will stuff the pockets of those in charge of the Bank, of course — but it will certainly be ploughed into hiring more economists and financial experts to come up with more “innovative ideas”, such as the QE programme that got us here in the first place.

All of which raises an obvious question: what is the Bank getting out of this? Now that it has quasi-taxation powers and the Government is filling the gap in its funding, what exactly is the money being spent on?

Back in 1998, when the Bank of England was made independent, there was broad consensus among economists on what central banks should do. By the Nineties, the basics of monetary policy management had been gleaned. This, the politicians and the public were assured, was a matter of science. The central bankers were simply carrying out objective exercises in economic modelling and using its interest rate setting policy to align the economy with its findings.

It makes for a nice story, but is it true? Probably not. The effects of monetary policy changes are far less predictable than central bankers make out, and the margin for error in economic forecasts is nothing short of legendary.

Even taking the story at face value is no longer plausible. This is because the Bank’s agenda has begun to creep. Consider its commitment to “net zero” in its corporate bond purchasing scheme, which includes updating the Bank’s “remit to confirm… the economic strategy of the Government”. What does this have to do with the monetary policy debates that led to the Bank’s independence in 1998? Absolutely nothing. It’s just economists playing politics.

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Or take the Bank’s research into a Central Bank Digital Currency (CBDC) — the so-called “Britcoin”. Some view its proposal as a totalitarian imposition. Others see it as the future of finance. It doesn’t matter which side is correct; the very fact that people disagree is the key point. Britcoin does not even carry the pretence of being based on “scientific” or “objective” macroeconomic models. Rather, it is a case of a bunch of economists, hired by a central bank which is independent of the government yet receiving bailouts, getting enthusiastic about investigating an idea and funding themselves to do so.

Here we can see the perverse nature of its incentives. The Bank of England has spent years engaged in experimental monetary policies that have blown a hole in its finances — and now the Bank is asking the Government for a blank cheque to help it find a way to move beyond the monetary policy objectives that were the excuse for its independence in the first place. You need not be a hardcore libertarian to see these developments as dubious.

What is the solution? A debate, perhaps. Let’s have the leaders of the Bank drop the often-haughty pretence of gnostic knowledge and have a real discussion. Let them justify — in clear constitutional English, not the financial jargon they so enjoy — the policies that have led to their own bankruptcies. And let them also justify both the powers they are requesting and what they intend to do with them.

The men and women who are working at the Bank are no doubt well-meaning, diligent civil servants. But perhaps, being economists, it might be time to calculate whether the incentive structure at the Bank itself has become corrupted.

It seems almost inevitable that the Bank of England’s recent decision to raise interest rates for the 13th consecutive time since the end of 2021 will push the UK economy into recession by the end of the year. Simply put, raising interest rates means that homeowners have to devote a bigger chunk of their disposable incomes (as much as 20%, according to estimates) to paying back their mortgages, potentially pushing 1.2 million households into insolvency. Renters, too, are likely to see their payments increase as buy-to-let landlords pass on higher mortgage repayments. Meanwhile, businesses will fail, workers will be laid off, and, with less money being channelled into the economy, the latter will ground to a halt.

What’s worse, this catastrophic scenario isn’t the result of the Bank’s economists not realising the consequences of their actions; among Britain’s policymaking elite, it’s the desired outcome. As J.P. Morgan’s Karen Ward, who is also an external adviser to Chancellor Jeremy Hunt, said: “The difficulty for the Bank of England is they have to create a recession. They have to create uncertainty and frailty.” Asked if he agreed with the idea of the central bank doing whatever was needed to bring down inflation, even if that could cause a recession, Hunt himself responded in the affirmative.

In this, however, he was merely channelling Andrew Bailey, the governor of the Bank of England, who said: “We’re not desiring a recession. But we will do what is necessary to bring inflation down to target” — even if that means causing a recession. Rishi Sunak has also expressed unwavering support for the Bank’s work, though no-one is more explicit than the Financial Times’ Martin Wolf, who went so far as to call for an engineered recession: “The question is not whether there will be a recession; it is rather whether there needs to be one, if the spiral is to be halted. The plausible view is that the answer to the latter part of this question is ‘yes’.”

If the idea of wealthy politicians, journalists and bankers (Bailey earns $575,000 a year) casually talking about the need to plunge millions of people into poverty makes your blood boil, good for you: you’re still human. But there is, of course, a logic to their madness. Their argument is that the British economy is facing a wage-price spiral, where workers demand higher wages to compensate for higher prices, to which companies respond by raising prices even more in an attempt to defend their profit margins, causing workers to push for even higher wages — and so on, in an inflationary feedback loop.

In this context, Bailey and his peers argue, the only way to break the inflationary spiral and put an end to the “unsustainable” wage demands of workers is to raise unemployment through an engineered recession, thus recreating a reserve army of labour and weakening the latter’s bargaining power. If such a policy sounds crazy, or wicked, it’s because it is. For starters, even if we were actually witnessing a textbook wage-price spiral, you would have to be particularly callous to blame ordinary workers for trying to protect their living standards and feed their families in the face of a cost-of-living crisis which they did nothing to create. Even the former deputy governor of the Bank of England, Sir Charlie Bean, has acknowledged this, criticising the Bank’s interest rate hike.

At the very least, this situation would call for a consensual approach to the problem, via wage and price guidelines that would distribute the burden of reducing inflation equitably among labour and capital, rather than a one-sided approach aimed at placing it on workers alone via higher unemployment. But even this ignores the fact that the UK’s wage-price spiral might not exist at all. Over the last two years, real wages — that is, wages adjusted for inflation — have been falling at among the fastest rates for more than two decades, while corporate profits, in several sectors, have been soaring. Workers, then, are already losing out in their tug of war with capital over who should shoulder the burden of inflation.

More importantly, there is no evidence that inflation in the UK is driven primarily by “irresponsible” wage demands or even overall excess demand in the economy (as was partially the case when the Government supported people’s incomes during the pandemic), which would at least provide some theoretical justification for the argument that the economy needs cooling down. If anything, we would appear to be witnessing a price-wage spiral, where workers are simply trying (and failing) to keep up with companies pushing up prices, rather than vice versa.

Since the start of the year, however, many of the supply-side costs which had been driving up prices throughout 2021 and 2022 — such as the increased cost of energy, fertilisers, metals and other commodities, as a result of supply-chain bottlenecks and the war in Ukraine — have been rapidly falling. It’s also hard to argue that Brexit is responsible when food price inflation has been higher in the euro area. So, why are prices continuing to rise?

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According to a number of economists, it all comes down to greed. The idea is that, in late 2022 and early this year, large companies, especially those enjoying considerable market power, have raised prices by a greater margin than necessary to accommodate for higher input prices, thus leading to considerable profit margins. As Albert Edwards, investment strategist at Société Générale, has observed: “Companies have used the ‘cover’ of supply constraints from the pandemic and the war in Ukraine to raise output prices well beyond what is justified to maintain margins” — and consumers have largely accepted these hikes as inevitable after hearing so many stories about energy prices, the war in Ukraine, supply-chain disruption, Brexit and so on.

Until recently, “greedflation”, or profit-led inflation, was dismissed as a fringe theory, but thanks to the work of economists such as professor Isabella Weber of the University of Massachusetts, its importance — at least in the US and eurozone — is no longer ignored. In March, experts at the European Central Bank concluded that profit margins had become the main driver of inflation, accounting for two-thirds of real-terms price increases in 2022. Just this week, a similar conclusion was reached by the International Monetary Fund, while several studies have pointed to a similar dynamic at play in the United States.

What about the UK? Unfortunately, neither the Bank of England, with its 4,500 staff, nor the Government, has felt the need to commission an in-depth investigation into the phenomenon, so we don’t really have much solid data to go on. However, analysis published in March by Unite, the UK’s largest private sector trade union, found that the average profit margins of the top 350 companies listed on the London Stock Exchange increased from 5.7% in the first half of 2019 to 10.7% in the first half of 2022. And a more recent study found that the jump in UK-wide company profits was responsible for almost 60% of inflation in the past half year, as opposed to just 8.3% due to labour costs.

Despite this, the Bank of England has systematically dismissed the issue of corporate profiteering. Only last month, Andrew Bailey said that the increase in corporate profits was not the result of greed but “a story about rebuilding margins that were squeezed, particularly in the early part of last year”. Even if this were true, it is telling that the Bank considers it fine for corporations to “rebuild their margins” after a two-year squeeze, but if workers demand higher wages to compensate for their own living standards squeeze, they have to be crushed.

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That said, there is evidence that, in some sectors at least, there is a degree of price-gouging going on in the UK as well. Food inflation, for example, remains at a historic high despite the falling wholesale costs faced by farmers and food manufacturers. MPs, academics and trade unionists have largely blamed supermarkets, accusing them of increasing food prices beyond the pace of inflation and their own rising costs. Tesco, the UK’s biggest supermarket, made £2.6 billion in adjusted operating profit in the 2022-23 financial year — £1 billion more than it made in 2018 and the highest it has made in any year other than 2021-22.

But the pressure may also be coming from further down the supply chain: from food manufacturers and producers. Margins among the big food manufacturers, for instance, are in the 16-22% range. And Paul Donovan, the chief economist at UBS Wealth Management, believes that thousands of companies have jacked up bills for many months, improving profit margins at their customers’ expense.

No doubt realising this, the Bank of England and Government have started to timidly acknowledge that big businesses may be playing a role in the inflationary surge — but it’s too little, too late. Indeed, following pushback from the industry, the Government quickly drew back from suggestions that supermarkets should impose “voluntary caps” on the prices of essential goods. What’s left is a recessionary policy that will do little to appease inflation, but will serve to punish workers for daring to protect their incomes. And this comes as no surprise: not for the first time, in the silent class war being waged by big business against workers and consumers, Britain’s technocratic elites have made it amply clear on whose side they stand.

Are things as bad as they were in 1978? Not on the surface, at least. Back then, the dead were left unburied and rubbish piled up in the streets as the government and trade unions entered into a battle to the death that both would lose. But today, like then, spiralling inflation is tearing at the fabric of society, forcing policymakers to squeeze the life out of the economy just to contain rising prices. And this time, it comes after 15 years of stagnant living standards; in the Seventies, life for the ordinary worker had improved year on year thanks to strong unions who could squeeze real-terms pay rises from employers.

Britain’s post-war economic history could be seen as one long battle against inflation and the search for an “anchor” to stop the doom loop of stop-start, boom and bust. In the Sixties and Seventies, both Labour and Tory governments adopted a “prices and incomes policy” believing that the way to control inflation was to manage people’s pay rises and what companies could charge for certain goods. This collapsed with the Winter of Discontent and the election of Margaret Thatcher, who came into power with her own grand theory, monetarism, which also failed.

Next, the European Exchange Rate Mechanism was taken up — only to spectacularly collapse in 1992, along with John Major’s economic credibility. At this point, we formulated the “inflation target” and then outsourced the problem to the Bank of England in 1998: a monetary policy committee of technocratic experts was allowed to set interest rates which would keep inflation to this target. With this, we believed we had solved the problem.

For most of the next 20 years, inflation was not much of a story. First came the boom years of Blair and Brown when, apparently, the business cycle had been abolished — an era Mervyn King referred to (tongue firmly in cheek) as the “nice” years of “non-inflationary consistently expansionary” economics, his point being that no such thing existed. This was in 2005 and King was worried about rising oil prices fuelling inflation again. But then came the crash of 2008 and the subsequent years of austerity and stagnating living standards, cushioned only by the record-low interest rates which have now spectacularly come to an end.

Today, with inflation almost in double digits, the Bank of England is squeezing the economy hard, ratcheting up interest rates. Sunak, meanwhile, is hinting at further wage restraint on public-sector workers to put even more downward pressure on the economy in order to hit his own political target to halve inflation by the end of the year.

This, some might say, is merely the Bank doing its job: force-feeding the country some necessary bitter medicine. The problem, in other words, is not the system, or even those in charge of the system, but conditions beyond their control.

But the Bank can’t have it both ways. Were those decades of low inflation really thanks to its good judgement? Or could other structural reasons have played a part? After 1998, China flooded the world market with cheap goods; immigration from poor parts of Europe soared; and trade unions were no longer powerful enough to protect their workers’ living standards.

Many regard the period between 1992 and 2008 as Britain’s golden age, when sensible politics reigned; inflation was low, the economy grew, deficits were sustainable, debt was low and Britain’s place in Europe was settled. This was the post-Maastricht, post-ERM settlement: Britain was in the EU but outside the euro, conveniently placed within both the European single market and the great global financial system — a trusted, stable, liberally regulated investment opportunity, perfectly placed to boom in the 21st century. After decades searching for our anti-inflationary anchor, we had found it. We had solved politics. Many people still yearn for this settlement to be rebuilt.

And yet almost every plank of this settlement has collapsed. The financial system blew up in 2008, shattering the British economy and, with it, the New Labour political settlement on which it was built. A few years later, the eurozone crisis revealed the diplomatic weakness of Britain’s place outside the single currency, precipitating David Cameron’s failed attempt to renegotiate the terms of British membership, leading to Brexit. Our faith that the Bank of England could control inflation is one of the last remaining planks left in place. And now that looks close to breaking.

There are good arguments that our current spike in inflation is a blip caused by the pandemic and Russia’s invasion of Ukraine. But there are other reasons to believe it might be here to stay. China, for example, is no longer simply a mass producer of cheap goods, but is turning itself into a high-skilled, hi-tech manufacturing superpower — a kind of super-Germany. Meanwhile, the great power rivalry between the US and China is bifurcating the world economy, throwing up protectionist trade barriers which will inevitably drive up the price of goods. And finally, the free movement of workers from Europe has ended with Brexit. In short, the three structural reasons which might have kept inflation low for 30 years are no longer in place. And this is before taking into account the energy transition to “net zero” which most Western governments are currently pursuing.

If we are entering a world of persistent inflation, high interest rates and the return of stop-start economics, you can bet that, as night follows day, the search for a new easy fix will commence — a new “anchor”. If only we returned to the EU, our problems would be solved, some will argue. If only we replaced the Bank of England’s monetary policy committee with better people; if only we returned to some kind of collective pay bargaining; if only we unilaterally abandoned our trade barriers. If only, if only, if only.

The truth is we have far less control than we like to admit. To think that we have solved the inflationary conundrum by outsourcing it to the Bank of England is as hubristic as all the other assumptions we made about the end of history in the Nineties.

Britain’s central bankers can’t solve the inflation problem in isolation. It has one set of tools — interest rates — and these are blunt instruments at best. In both the Seventies and Eighties, it quickly became clear that monetary policy alone was not enough to deal with inflation; fiscal tightening was also necessary. And even then, sudden shocks in the global economy completely changed the domestic picture, whether the oil price rise of 1973 or oil price crash of 1986.

The other lesson from history is that the battle to control inflation is, by its nature, political not technocratic. Whichever method you choose to keep it under control, the burden necessarily falls on one group in society over another. In the Seventies, unionised workers protected themselves with good pay rises, while those living on fixed incomes, like the elderly, were badly hurt. Over the past 15 years it has been the opposite. Today, meanwhile, it looks like the burden will fall on those with mortgages — a group that has largely avoided the pain until now.

While inflation seemed under control in the Nineties and early 2000s, few paid much attention to the distributional consequences of the system, but today the whole structure is back under scrutiny. And so it should be. Not only is the Bank’s competence fair game, so too is the system itself, resting as heavily as it does on interest rate rises over other tools.

With an election on the horizon, we may find ourselves in a new world where the Bank of England is working to meet a medium-term target set by a government whose other policies are making it harder to reach that target. This was briefly the case under Liz Truss, when she tried to put rocket boosters under the British economy regardless of the inflationary consequences. In doing so, she was not acting like her hero, Margaret Thatcher, but far more like Ted Heath in 1972 who ordered his chancellor Anthony Barber to unveil an expansionary budget in time for Britain’s entry into the European Economic Community in 1973, wrongly believing a virtuous cycle of growth and modernisation was on the horizon.

Truss is unlikely to be the last prime minister to find themselves in conflict with the Bank. Will Sunak really be able to avoid the temptation of an inflationary tax cut before the next election? Don’t bet on it. And if he does cut taxes, prepare for the squeeze after the election — and the stop-start cycle begins again.

The eternal truth is that there is no magic cure for Britain’s economic ills — no framework which solves our problems forever. Governance is art, not architecture: the management of circumstance, not the building of permanent structures. Inflation is back and so too are the politics of inflation. Strap in for a bumpy ride.