Not so long ago, the dominant economic issuing facing the UK was a point of contention. Slow wage growth, a poor economic recovery and the dilapidation of public services was the calling card of Labour, whilst the Tories focussed on the deficit and the UK’s creditworthiness.

Today, however, everyone can agree on the greatest short-run economic challenge for the UK. The buzzword, both in the media and amongst politicians, is ‘cost-of-living.’

With sky-high fuel prices and supply chain issues feeding into inflation, prices are a serious economic challenge for the UK, but what should Labour do about it?

Firstly, Labour must take a firm line on inflation. Before Bank of England independence, inflation was a major dividing line in British politics. The Tories were seen as more hawkish on price levels, and Labour’s relationship with the then-powerful trade union movement threatened their credibility when it came to controlling wage increases. Monetary policy, particularly regarding balance of payments, was a cause of the positive image of Tory economic management that helped lock Labour out of power for decades. This is an intolerable situation, both politically and economically.

Politically, we saw in the aftermath of the Great Recession that the idea of a nation's overall economic health often trumps personal finances to voters. The fear of a default on our debts, a low probability but very high impact event, helped the Coalition take power in 2010. Think how the Tories could leverage the threat of hyperinflation, in which your savings are worthless overnight, you are locked in constant battles with your employers for nominal pay increases, and the price of everything fluctuates daily.

Economically, runaway inflation would also be a disaster. Once inflation begins to take-off, both employees and companies selling products begin to price it in. Since the price of bread can’t change every day, the baker has to price their loaf for where they think the price will end up at the end of month, not where it is today. As a result, high inflation doesn’t just mean a steady rise in prices, it produces higher inflation, in an inflationary death-spiral. Consequently, inflation is not the same thing as the ‘cost of living crisis’, as it is nearly unanimously referred to in the media. A ‘cost of living crisis’ is a problem, but it can be addressed through distributional interventions – for example slashing VAT on fuel or offering a tax credit to the working poor and an increase to Universal Credit. Inflation, however, cannot be tackled like this.

What began as a temporary shock to prices, due to the pandemic, Brexit, and global energy prices, could easily become a permanent decrease in price stability.

Furthermore, in today’s largely non-unionised economy, spiralling prices may well impact the poorest in our society the most. After all, a wage negotiation is much easier to facilitate if you are a middle-class, white-collar worker than if you work on the floor of an Amazon factory.

So, real-terms pay cuts or high interest rates may be bad for the country, but high inflation would be even worse. The left cannot enter into a debate over whether to control inflation, because we would, and should, lose.

Given that we must take a hard-line on inflation, then, what can be done?

Firstly, the Bank of England must be allowed to do their job. Where monetary interventions, like the reduction in Quantitative Easing or the hiking of interest rates, are necessary, they must go ahead. This will put the Government in a tricky position since their finances will worsen and debt servicing will become more expensive. Labour must resist the urge to ignore this issue and must instead tackle it head-on, proposing common-sense taxes to stabilise the fiscal position – for example by levying a windfall, not just on energy companies, but on all sectors which experienced unusually high profits during the Pandemic, and by advocating meticulous care over the efficiency of public spending. It is still too soon for the Government to choke the economy of demand and we do not want a repeat of 2010, but we also can’t maintain the level of spending seen through the crisis as inflation climbs higher.

Secondly, the Government must ease the distributional effects of anti-inflation policy. Hiking interest rates, for example, will hit the indebted particularly hard. Efforts must be made to redistribute money from those who will benefit from higher rates towards those who will most suffer. A sensible way to do this would be to equalise capital gains and income tax, so that as the returns to investment increase, workers can also benefit.

Finally, don’t forget about expectations. If the public, both as producers and consumers, believe that prices will go up, they will. It is the everyday decisions of employers and employees, firms and consumers, that translate into a rising price level. As a result, institutional players, crucially including the Labour Party, must be unequivocal in the fight against inflation. Markets can have no fear that, under Labour, Government policy might undermine our independent central bank. After all, the central bank independence and the crushing of inflation is one of Labour’s most important economic achievements. Let’s not throw it away.

Matt is the Vice-Chair of the Economy and Finance Network. He is a final-year Economics student, hoping to work in political or economic advice. He’s from Merseyside, Labour’s true heartland, and writes frequently on a range of economic and political issues.

His interests in Economics focus on microeconomic theory and Public Policy, and his politics are characterised by a near-pathological obsession with returning Labour to government. He tweets at @matthewoulton.