Basic economic texts tell us that inflation is caused by an increase in demand and that inflation can be reduced if interest rates are increased, since the increase in the cost of borrowing will dampen the demand for ‘stuff’ and reduce the upward pressure on prices.
The Bank of England seems to have read this part of the economics text book, since it has been relentlessly pursuing a policy of increasing rates to tame inflation with, it has to be said, no great success.
That’s possibly because this strategy is designed to work when inflation is caused by excess demand, but that’s not the reason we’re seeing increased prices at the moment.
The inflationary pressures were facing at the moment are in part due to lack of supply following the war in Ukraine. On top of that the Bank of England printed lots and lots of money during the Covid lockdown, and this has produced its own inflationary pressures, as has the way we came out of lockdown as the Covid pressures receded.
Oh, and leaving the European Union has had an impact on supply as well, although we’re not supposed to mention that!
So all in all a complex set of circumstances seem to have been dealt with by the Bank of England using what i sees as the only tool it has in its arsenal to combat inflation – increasing base reates, and hence the cost of everything we buy using debt, including our houses.
This hasn’t reduced inflation by much, but it has increased the pain that millions of families, already struggling with the increased cost of many of the essentials they have to buy on a daily basis, are feeling.
Inflation would have come down on its own in time. The Bank of England’s intervention is clumsy and unnecessary and shows a Bank bereft of ideas which, when combined with a government in Westminster similarly bereft, is a recipe for disaster for all of us.