Oil prices are soaring right now.
The Straits of Hormuz are shut.
The Suez Canal might be.
These actions have consequences.
One will be inflation. Keep the conflict going, and that inflation will have a serious impact.
So, let me just make it clear to the Bank of England:
- Raising interest rates in response to this situation will not increase oil supplies.
- This is an international supply shock. Nothing you can do will change that.
- Increasing rates will, however:
- Compound the shock.
- Massively increase its impact.
- Reinforce the trend towards recession.
- Make millions' lives very much worse, wholly unnecessarily.
So, to be polite, please don't be stupid. Don't start sending out noise about rate rises. It really will not help.
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I can’t imagine that Rachel will order Bailey not to increase the the base rate.
As usual the response will be “there is other other choice but to increase the base rate”.
Recession anyone?
When gas prices rise at the pump in the USA, which has not yet occurred, Trump’s die-hard MAGAt base will be more than very upset.
The Floridian MAGAts are very upset now as they hate any type of “foreign intervention” but when this “foreign intervention” hits their wallets they will bring out the torches, pitchforks and AK-47s if they do not already have them ready for action.
The price of Us Oil (wti ) as increased dramatically since hitting a low for the third time just before Christmas of $55. It has since risen quite dramatically (now $67.28) .That is a big move north. In June of last year it was up at $77.5 and was above $80 in Jan of 2025.I think those levels could be tested again as soon as the Sunday night opens in the east or on Monday or Tuesday. This does depend on the news flow. Then think about that price adjustment. It will have risen from the Christmas lows of 2025 , $55 to last week $67 and could possibly hit $80 this week. Some are even talking about $100 oil and even more worryingly shortages. Trump will not want this he will desperately not want this. He has to keep oil moving to keep supply strong and to make sure the upward trajectory does not become permanent. These high oil prices will very quickly hit peoples pockets both with their regular fill ups and with their weekly shops. This will happen both here in Europe and across the pond. As Richard suggests it could be the catalyst to a deeper market correction, the longer or the worse it becomes the deeper the correction.
@Rob Harmon,
I referring to “price at the pump” which in the USA lags behind any price increase or decrease of the price of a barrel of crude.
Gas prices have weekly fluctuated +/- .10 cents a gallon over the last year. In Florida, we have not seen MAJOR price swings or price increases as we have seen in the past.
Am I right in saying that all we know what is going to happen next?
I fully expect Rachel to do nothing…
I fully expect the BoE to somehow blame this on consumers spending too much, and therefore raise rates to “dampen demand”…
Our leaders rarely if ever do the right thing these days, it’s all so very predictable.
Expecting wisdom from Mr Bailey? We live in hope.
I watched “Spank the Banker” last night, as revision on just how corrupt our financial system is.
The boss of FCA, the chocolate teapot regulator at the time of that deep seated £100bn criminal (convictions, jail-time for a tiny number of perps) banking scandal?
Mr Andrew (sit on your hands) Bailey.
https://m.imdb.com/title/tt10917024/
https://duckduckgo.com/?t=fpas&q=spank+the+banker&ia=videos&iax=videos&iai=https%3A%2F%2Fwww.youtube.com%2Fwatch%3Fv%3DyBGQPmYE4AQ
Warning – the title of this documentary produces YouTube video search results of a mostly non- financial nature – the 2nd link takes you to the film itself.
Apparently, we “can’t afford” to properly compensate the victims whose lives were destroyed by these crooks, with the full knowledge of their boards of directors.
Bailey is just a time server with hie eye on a detached house in Surrey and a nice pension. So, he won’t rock the boat, but always err on the side of caution. He’s probably never heard of cost-push inflation despite living through Russian Gas supplies causing such a phenomenon only a few years ago. The Iran invasion is certain to increase oil prices, but it’s hard to say by how much. Some ‘experts’ are suggesting 10%.This will affect prices across the whole economy, increasing inflation unless other factors are pushing it down at the same time. Energy costs are set to fall in April. You also have to bear in mind what inflation was last March and April because those monthly figures will be dropping out of the yearly figure as they are replaced by this year’s figures for March and April.
I’m not sure that oil prices will soar when the markets re-open. I recall the Hargreaves Lansdown summary of three weeks ago saying that a 50% chance of Iran being attacked was priced in. The Brent price then was around 69, last Friday it’s around 72. A prediction that it’ll go to 75 is realistic.
This is speculation from both of us of course.
Regarding the bank of england rates setters, they will not be overly moved from a policy perspective as fuel is not included in core inflation for the reason that the price is volatile.
The blinkered approach of Andrew Bailey and the MPC makes me angry. They are like robots…”Inflation to 2%…Inflation to 2%…Inflation to 2%…”
What matters is what is causing it. If oil prices rise then that is external cost-push inflation, rather than internal demand-pull inflation. You don’t solve a problem like that by making money even more expensive. It is like throwing petrol (literally) on a fire.
Agreed
How inflation works.
MMT describes the price level as a function of government prices paid when it spends….
If the government spends £10 on 10 chickens, then £1 would be the value equal to 1 chicken. The rest of the market follows suit.
However, (now this is the key) If the government spends £10 on 10 chickens, and the very next day, it announces it got it wrong, and orders the central bank to pay an extra £1 for each 10 chickens sold… Then the price level is is now £11 for 10 chickens. Or chickens are now £1.10 each. 10% more. This is obvious.
But the thing is this, it doesn’t have to be the very next day. It could be the very next year.
– The government spends £10 on 10 chickens. £10 sits in a private account at the bank of england.
– 1 year later. the bank of England pays the base rate on that £10…call it 10%. So, in total the gov paid £11 for 10 chickens. And even if the person who has that £10, decided to spend it elsewhere, that £10 still exists in the Bank of England, just in a different account. And so paying interest on that £10 is just a repricing upwards of previous government spending.
– So the price level, over a year, changed upwards from £10 to £11 for the same thing.
– That is inflation.
Hence. Interest rates drive inflation. They do not throttle inflation. They drive it.
There is an element to this, but you are being too simplistic. Most inflation is driven by external events e.g. Oil prices shocks.
True. Inflation has many components, and If the government decided not pay the increased prices due to supply side / external shocks causing shortages, then the decrease in spending (due to not buying) would cause a recession, which would not be good for anyone.
Base/bank rates do influence inflation I believe far more than what is claimed, even by many MMTers (of which I am one). Inflation is still high after Covid, and that, I believe, is directly attributed to Bank of England’s policy to keep rates high. If it wasn’t for the high rates, we’d be back at 2% inflation or less by now.
I have to disagree
Interest rate changes take 2 years to have an impact according to central banks. How does that control inflation?
And is inflation that high? And if it is, is that because interest rates are?
On that point I think we agree.