This sort of post from a responsible journalist is commonplace this morning:
Inflation to a 10 year high, a day ahead of the Bank of England's latest decision on whether to hike interest rates. Officials under pressure to act to curb spiralling prices but reluctant to jeopardise the already stuttering economic recovery. https://t.co/ERdsAP9I3W
— Beth Rigby (@BethRigby) December 15, 2021
The Office for National Statistics has published data this morning showing that inflation is at its highest rate since September 2008:
It's as if the Global Financial Crisis never happened. And that is the key thing to remember when appraising the demand that many will be making that the Bank of England respond to this increase by in turn increasing its base interest rate this week, probably from 0.1% to 0.25%.
The very people who are making that demand are precisely the same people who also want us to get back to what they call 'normal'. This, in their view, is the world as it was before that Global Financial Crisis. Most especially, what they recall is that there were positive interest rates for depositors before that time and they wish that situation to be restored for the benefit of wealth holders, who we can presume include them in their number.
There are three things to note. The first is that the biggest contributor to this increase in inflation is fuel costs, whether those are for domestic energy or motor fuel costs. There is absolutely nothing the interest rate change will do to influence this price. That is also true of some other factors that have inflated this index, including the extraordinary increase in the price of secondhand cars, which this chart demonstrates:
There are a lot of people who are going to make some very heavy losses on the vehicles that they have bought recently. In fact, in this case the one thing that you can be sure of is that this price change is very definitely going into reverse sometime relatively soon: it is quite impossible that secondhand cars can maintain these prices in the long-term. The consequence will, of course, mean that inflation will reduce.
In other cases, it is important to note that the inflation is likely to be one-off. In other words, whilst there have been increases we will not see a similar pattern in a year's time. In that case, simply because of the way in which this index is calculated inflation will fall, significantly, at that time. This is the second reason why the Bank of England does not need to react now to this data. Imposing a real cost on the economy to address a self-correcting situation makes no sense at all.
Third, if the overall composition of inflation increases is noted it is transport and housing and household service costs that have increased dramatically. If they were reduced rate seen only a short time ago and there would be nothing much to comment on now.
So, as already noted, much of this issue is wholly beyond the reach of interest rate changes. In that case unless it is the desire of the Bank of England to put increased pressure on household budgets that are already stretched to the limits they should do nothing this week. If they do I will applaud them for their inaction, which would be wholly appropriate.
But, if they do increase rates then we will have to come to the conclusion that the Bank of England is, at the very least, a bunch of economic sociopaths who put dogma before evidence and who wish to trash the economy at a time of enormous stress within society, and that should worry us all. It will be interesting to see what happens.
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Been here before, 6 Day War and the Yom Kippur wars triggered large oil price rises which drove inflation up. The eventual (Thatcher) response was 15% interest rates etc etc. Which could be described as socialism for the rich . The market response to rising energy prices was energy efficiency. Taking one instance, a move to more fuel efficient cars (& lower speeds on motorways).
Our discussions on gas prices (the oil of the 1970s) is that they will relax back (2022) to something in the range €25 to €40/MWh. Why this price range? The Russians see where the trajectory is going (lower nat gas use) so will want to make hay while the sun shines & higher prices are desirable (2020 through to early 2021 saw €10 to€20/MWh) . The market response to higher gas prices will focus on energy efficiency (heating) and higher gas prices will make renewables at all scales more attractive as well as pricing in fuels such as green H2.
Raising interest rates (in response to inflation) will impact on renewable WACCs (weighted average cost of capital) for renewable projects – making the levelised cost of a kWh more expensive and making renewables less attractive, relatively speaking, to gas. Another way of characterising a rise in interest rates is that this will help Mr Putin and his friends – by decelerating the move away from gas (as a source of electricity).
Well put
The Yom Kippur War was in 1973 when Heath was in charge not Thatcher, but still a Tory, of course.
You are correct (re Yom Kippur). However, my point is that inflation in the 1970s was partly fuelled by oil price rises (and a moderately tight labour market) leading to something of an inflation spiral from 1974 through to 1980. Things would eventually have worked themselves out (economically) but Thatcher decided otherwise – with a highly simplistic approach – raise interest rates.
[…] Cross-posted from Tax Research UK […]
Given that the inflation being experienced is not driven by credit, increasing interest rates will have little ‘braking’ effect on inflation, however might it have the opposite effect? Increasing costs for servicing of debt, mortgages etc will cause further inflationary pressures on individuals and businesses who will suddenly need to increase their income?
It feels counter-intuitive to me.
So if the cost of fuel is driving inflation why not reduce that cost by lowering the tax on it?
Sorry, I forgot, this is the Conservative Party!
🙂
I fully agree with your analysis here (my bet is they’ll raise interest rates just to show how ‘serious’ they are).
I’ve a related question regarding inflation , the quantity of money and MMT.
One of the main (but bogus) criticisms of MMT is that it leads to hyper-inflation with Zimbabwe, 1920s Germany, Venezuela being trotted out with the explanation generally that in each case these were suffering other catastrophic problems (Zimbabwe – self-destruction of local economy, Germany – punitive WWI reparations & Venezuela economic warfare from the US_) concurrent to local corruption & mismanagement.
Could this country – or any other – now be at risk due to the responses to CV19 causing that concurrent destruction? Could the US be at greater risk due to their failure to protect the less well off there?
I answered this in here
https://www.taxresearch.org.uk/Blog/2021/05/03/money-for-nothing-and-my-tweets-for-free/
See also this tweet thread
https://twitter.com/RichardJMurphy/status/1432285706924273665?s=20
So we would like to bring down the cost of fuel presumably in particular for natural gas.
And increasing interest rates won’t do that
So what will?
Fracking permits and a CO2 tax I suggest.
Read what Mike Parr had to say
You are way out – absurdly so
And have you heard of climate change?
I say again, to raise interest rates is simply using inflation to fight inflation and then claiming that you are controlling the cost of living. All it does is transfer the high price mechanism from the consumption side of markets into the debt portion of the economy and increase returns for those issuing debt. It helps them get a slice of price gouging pie.
It’s an intellectual obscenity – of which there are far too many these days.
“ Bank of England is, at the very least, a bunch of economic sociopaths who put dogma before evidence …”
Many of us have known that they have always been. As are most Central Banks of the world. They are family.
I repeat what has been my assessment since the out of blue price rises earlier this year – They will have their interest rate rise by hook or crook!
Price of beer also was put up and is killing the pubs even more than Covid.
A complete farce that is supported by the complicit politicians.
BoE also sets up more man traps by changing affordability criteria to mortgage interest rate rises yesterday. Gathering more scalps to harvest.
What will Starmers focus be on at PMQ’s? His failure to defeat the government yesterday? The failure of the NHS? The Chancellors failure of narrative, just as the US finds a magical 2.5 trillion dollars when they couldn’t find a trillion for their infrastructure and Medicare? Or the major geopolitical showdown happening today – which the MSM is treating like Nelson turning a blind eye!
The system can only be changed and we can only be saved through mass protest, smart protest.