UK inflation is rising again, and the danger is that the Bank of England will respond in exactly the wrong way.

Inflation is now 2.9%, household energy prices are expected to rise sharply this autumn, and disruption to energy supplies through the Strait of Hormuz threatens further increases. At the same time, drought is putting pressure on food supplies and prices.

None of this is being caused by excessive household spending or workers demanding too much money. These are supply-side problems. Yet the Bank of England could respond by raising interest rates.

Higher interest rates cannot produce food after a drought. They cannot create oil or gas. What they can do is increase mortgage payments, rents, car finance, credit card costs and other borrowing costs. They can reduce household spending, increase unemployment and make recession more likely.

That means households could be punished twice: first by higher prices for essentials, and then by higher interest rates supposedly intended to tackle those prices.

There is an alternative. The government has powers under the Bank of England Act 1998 that it could use in an emergency. There is a cost-of-living crisis. They say so. The Bank of England could be told to hold or cut rates. Independence does not mean that ministers have no responsibility for what happens.

If rates rise again, the resulting economic pain will not be inevitable. It will be the consequence of political choices.

This is the audio version:

There is no Debate Ammunition for this video. IT problems prevented me from having the time to make it. That's life.

This is the transcript:

UK inflation is rising again. It's now at 2.9%, but the underlying trend looks to be upwards, when it was expected to be going downwards, because it often does during the course of July. Household energy prices are also expected to rise by 13% this autumn. The Strait of Hormuz is still closed, so all the issues that I've been talking about for a long time, arising from that, are going to hit our economy during the course of this autumn, with an impact on inflation. Food shortages are also expected because of the drought we have suffered for the last two months. Food prices are therefore likely to rise sooner than I expected. I thought they would happen because of fertiliser shortages next year. But they're going to happen now because of drought. This is going to create a problem inside the UK economy.

UK households are going to have to spend more on essential items, the prices of which are rising. That doesn't mean they're going to spend more overall, because they haven't got more to spend unless they extend the purchases on their credit cards, and most people are already at their limits on those. So scarcer fuel and food are going to push their prices higher, and people are going to divert their spending from non-essential items to those essential items instead. But whilst we have a Consumer Price Index in the UK that is insufficiently sensitive to allow for those reallocations of spending towards essentials from non-essentials, we are going to see that inflation index rise. We're going to see higher reported inflation, and we're going to get major consequences of that.

And let's be clear: people in the UK have little capacity to absorb another cost-of-living crisis now. Wage increases in this country are at the moment at their lowest level for several years. The post-COVID process of wages catching up with inflation has ended. The labour market is weakening, unemployment is rising, and millions of people will, as a result, struggle to meet the additional costs that will arise from energy, food and elsewhere.

But that squeeze on their capacity to spend will not prevent the inflation index from rising, and the Bank of England could respond by raising interest rates. The Bank of England focuses on inflation alone. It is not required to consider the wider cost-of-living when setting interest rates in this country, which is a major policy mistake, and its only tool for tackling inflation is to change the interest rate, even though we know that this is an imprecise, crude, and highly ineffective tool for tackling inflation.

What we already do know is that three members of the Bank of England Monetary Policy Committee already want higher rate rises. They voted for them last month, and higher autumn inflation could give them the argument they need to increase them next time round. Markets are already pricing in the possibility of higher interest rates. I suspect they're going to happen, unless something intervenes to stop it.

The Bank is going to want them because it thinks that higher inflation becomes embedded in the economy if they take no action. And in practice what that means is they do not want people to ask for pay rises to recover the lost real spending power that they're going to suffer as a consequence of fuel price increases now, and food price increases now. In other words, they want people to be permanently worse off. That's how they want to manage inflation risk.

But that is not sustainable inside our economy. We are, as a consequence, going to end up with a loss of spending power in households through no fault of working people if the Bank of England get their way. Drought and war are not the fault of UK households, but the Bank of England wants to punish us for them.

And that means that the Bank of England will raise rates. Mortgage costs will rise. Rents, car finance costs, credit card costs, and other borrowing will all cost more. But higher interest rates cannot bring rain after a drought. And higher interest rates cannot create more oil and gas. Interest rates in the UK do not reflect the real-world economy is the point that I'm making, and raising them could only reflect adherence to an economic dogma ; it would not provide an economic solution to the problems that we face.

Now, the government could intervene to prevent another interest rate rise. That is something that most people do not know. But the power exists within the Bank of England Act 1998, and John Healey, as Chancellor of the Exchequer, could tell the Bank of England, “Keep interest rates on hold.” He could say this is an emergency situation and they must act as he wants. Rates could be kept below those demanded on government bonds in the financial markets, and the government has this soft power to intervene. In my opinion, it should use it.

But Labour will probably hide behind Bank of England independence as Rachel Reeves did and all her Tory predecessors did. John Healey will claim, like his predecessors, that nothing can be done to tackle the problem that the Bank of England creates, and that is simply not true. By not acting, Labour will be choosing the consequences of higher interest rates.

The Bank of England is an agency of government. Its notional independence does not remove government responsibility. Governments can see that this inflation comes from supply shortages and not from any action within the labour market which is driving up prices. They can therefore see that higher rates will not solve the problems around additional supply.

They can also see that forcing up interest rates will put downward pressure on the economy as a whole. They can foresee that this will mean recession. They can see that this will mean households will face stress and refusing to intervene when they can see all that would, therefore, be a political choice, but I believe that's the choice they're going to make.

The consequences of higher interest rates will be severe. Households will suffer unnecessarily. Unemployment will rise. Recession will become more likely. Inequality and personal misery will increase. Economic failure will create further support for far-right politics. We need politicians who understand the consequences of their policies, particularly when it comes to this issue. Ignorance cannot excuse imposing unnecessary economic suffering.

Politicians have told us that there is no alternative because they've been told there is no alternative, but they have to inform themselves so that they can make a sound judgement on this situation. They should not accept the claim that there is no alternative without question. Thatcherite economic thinking still constrains political choices in this country, and we are all going to pay the price until that thinking changes.

That is my deep concern at this moment. We are going to be in trouble precisely because the Bank of England is going to put us into difficulties which are wholly unnecessary, and our politicians will do nothing about it. That is a crisis that is entirely avoidable.

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