This time last year, inflation in the UK was running below the Bank of England’s target. Today, it’s running almost twice that same target.

What does that tell us? I don’t know, if I’m being honest. The real story — the math-based story — is in the ONS numbers, and if I wanted to spend all day parsing the data, I could reverse engineer the resurgence in annual price growth and quantify the impact of base effects, and so on.

But my point in mentioning it isn’t so much about the UK story in particular as it is about inflation across developed economies five years on from the pandemic. It’s true that price growth’s returned to target in some locales, and even across them (inflation’s more or less stable across major EU economies, for example), but it’s hard to shake the notion that we’ve entered a more volatile era for macro outcomes, including and especially inflation.

The UK’s emblematic of that, and a lot else. The history of the UK over the past decade is in many ways a history of the developed world over the same period, encapsulating as it does a number of consequential macroeconomic and political shifts, from the rise of populism to the return of inflation to the specter of emerging market-style fiscal crises in the highly-developed, reserve currency-issuing world.

That’s the big picture context for an otherwise skippable (from an editorial coverage perspective) Bank of England meeting on Thursday. The BoE was on hold, as expected, and the 7-2 vote split (two doves dissenting for another cut) was also in line with expectations following a truly fractious August gathering which required two votes to produce a decision.

The figure above underscores the intractability of the UK’s post-COVID battle with inflation. Headline CPI’s back near 4%, so’s the core measure and there’s been no meaningful disinflationary progress on the services side in over a year.

To be sure, the BoE expected inflation to drift back up. The bank’s forecasts preemptively reflected the re-heat beginning in February, when the projections flagged a Q3/Q4 upside inflection which the MPC warned would be “quite sharp.” But that doesn’t make it any less vexing, and the language from Thursday’s statement suggests the easing cycle — among the longest and shallowest of the post-War period — is for all intents and purposes done.

Indeed, market pricing suggests very little in the way of additional rate cuts over the next 12 to 16 months. “The Bank is growing more reticent to cut rates further from here,” ING’s James Smith remarked. “Some have gone as far as to say the easing cycle is over.”

So that’s that. In addition, the BoE on Thursday cut the rundown rate for its gilt portfolio (i.e., slowed QT), consistent with market expectations. Recall that the bank conducts an annual review in September to determine the appropriate QT pace for the year ahead. On Thursday, the BoE described the situation in the UK government bond market three years on from the Liz Truss/LDI blowup:

In common with other advanced economies, term premia on long-term government bonds [have] risen through 2025. That reflect[s] global economic policy uncertainty, high issuance of government bonds across countries and structural changes within the UK bond market that [have] reduced demand for long-term government debt. Although the UK gilt market continue[s] to function in an orderly manner, these factors could pose a risk that QT would have a greater impact on market functioning than previously.

The last sentence is key: You don’t want to be too aggressive about unwinding your balance sheet when the bond market’s acting up, and you certainly want to be careful about active sales at the long-end.

A quick glance at the specifics of the QT parameters shows the BoE will “aim to sell fewer long maturity sector gilts than gilts at other maturities, to better reflect demand conditions.”

That’s a nod (and a rather explicit one) to what it’s fair to call intense upward pressure on longer-end UK yields which, you’ll politely recall, soared to a near three-decade high earlier this month before mercifully retreating.

Do note that the BoE was (and still is) in a rather absurd position with regard to its gilt holdings. Selling them down (i.e., active sales on top of passive rolloff) is risky at a time when the market’s fragile, and as noted by the bank, could exacerbate pressure on the UK long-end. It also crystalizes losses on underwater holdings. But sitting with them (longer-end gilts) is to incur interest-rate losses on the (negative) spread between what the bank pays out on reserves created to finance the gilt purchases and the fixed payments on those assets.

Remember: This isn’t a trivial concern in the UK. Unlike the US, these losses aren’t treated as a meaningless accounting entry. Rather, the BoE’s indemnified by Treasury. The BoE’s QE program, which started in response to the GFC and ran all the way through the COVID crisis, resulted in a gilt portfolio of almost £900 billion. Once Bank rate moved above 2% midway through 2022, that portfolio went from being a profit machine to a loss-maker.

For a decade beginning in 2012, the BoE’s QE program made regular transfers to the UK Treasury. The first transfer in the opposite direction occurred three years ago, in October of 2022. The figure above gives you a sense of things. It also shows you various projections based on different QT and rate scenarios.

The estimate which accompanied the BOE’s QE report for last year put the total cost of the program to UK taxpayers at £150 billion by early next decade. That figure obviously moves around (as the chart above, from the bank’s quarterly QE report published last month, indicates), but it gives you an idea of how onerous Treasury’s indemnity commitment can be when macro events compel BoE rate hikes.

Simply put: As long as the composition (the WAM) of the gilt portfolio is such that the fixed payments undershoot payouts on reserves, this Ponzi scheme’s an enormous albatross. It’s probably fair to say that regardless of what anyone might’ve modeled when the indemnity arrangement was established in 2009, an inflation surge as large as the one witnessed in 2022 and commensurately aggressive rate-hiking campaign weren’t seriously considered.

There aren’t a lot of good options here for the BoE nor for Treasury. The bank can cut its exposure to the interest losses (and thereby alleviate some of the indemnity burden on Treasury) by selling down its holdings, but when it does that, it crystallizes mark-to-market losses, triggering a separate Treasury indemnity payout which of course has to be funded by issuing more gilts. All else equal, that extra supply biases yields higher, exacerbating unrealized mark-to-market losses on the remaining gilts in the BoE’s portfolio without doing anything to ameliorate the interest-rate losses on the spread between the portfolio’s fixed-rate payments and variable-rate payouts on reserves.

Dialing back QT, as the BoE did on Thursday, can alleviate upward pressure on long-end yields, but it prolongs the interest losses. That is: The longer the BoE holds onto these things with short-end rates still miles above levels required to make the whole charade “profitable” again, the more it’ll cost Treasury to indemnify the BOE against the interest-rate losses. And the more difficult it’ll be for the Chancellor (in this case the beleaguered Rachel Reeves) to keep up appearances vis-à-vis sundry budget rules and fiscal constraints.

I know what you’re thinking: “Jesus Christ, really? That’s so bad. And so ridiculous.” You’re not wrong. But then again, the indemnity also forces everyone involved to reckon with the uncomfortable reality that these programs (QE programs) are, inescapably, a kind of Ponzi scheme. When you’re buying debt from yourself and moving the “profits” and “losses” back and forth between your left and right pocket, with the difference between the two (profits and losses) contingent on an exogenous factor you can’t control (i.e., inflation), you’re running a significant risk. You can paper over that risk (figuratively and literally) by only recording the profits and treating the losses as a “deferred asset” à la the Fed, but that doesn’t change the underlying reality.

Coming full circle, I didn’t want to gloss over Thursday’s BoE meeting despite the outcome counting as in-line with consensus both on the rates decision and the specifics of the QT reduction. Considered on their own, the September statement and meeting minutes were as boring as boring gets. But the context is critical. Because it says a lot about what I’m confident in calling an across-the-board, multi-faceted credibility crisis for many of the world’s most economically advanced democracies.