The IMF is delivering its usual economic orthodoxy in force at its Autumn Meeting, as this report from the FT suggests:
The IMF has warned that above-target inflation risks becoming entrenched in the UK as it forecast the country would see the highest price growth of any G7 nation over the next two years.
The fund's chief economist said the Bank of England should be wary of lowering interest rates before it has quelled the latest outbreak of inflation, adding that the central bank is likely to hold off further reductions in its key rate until 2026.
So, to beat high prices, the mantra is to keep the cost of money high.
Can no one see the paradox in that?
And does no one appreciate that if the rate were cut, then:
- Rents might fall
- Lease costs (which now have a big impact on household costs) might fall
- The cost of mortgages would fall
- The pressure for high wage settlements will fall
- Spending power would rise, delivering growth if that is what is desired
I could very easily expand the list, but I don't think I need to.
Isn't it now apparent that the reason why inflation is embedded in the UK economy is precisely because we have interest rates that are too high, making us outliers on that issue, as we also are on inflation in the countries that the IMF is comparing us to? Is it really that hard for those in power to join up the dots and realise that there might be a link between the two?
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Inflation has been “sticky” – a year ago I (and I think you, too) expected inflation to have fallen back to target by now and it hasn’t.
The reasons are complex but certainly, government controlled prices (water, energy, transport etc.), price gouging (corporate profits are still very healthy) and “interest rates as a cost” all play a part – along with some other things we don’t understand.
What is clear is that we expect far too much of monetary policy to control the economy and inflation. “The great moderation” of the 90s and early 00s was not due to Central Bank independence and expert execution of monetary policy merely coincident with it. When “events” intervene is is fiscal policy that must take the strain…. and what we need right now is tighter fiscal policy to control inflation. That is the political battleground – raise tax or cut spending. Sadly, no politician will grasp this nettle.
Much to agree with
And yes, I had expected rates to fall
But when the economy is built for above inflation price rises on key items maybe that was naive of me
My memory is a bit hazy but many moons ago government spending allocations were always talked about in real (ie. inflation adjusted) terms and increases in line with inflation were always expected. That was changed (by Thatcher, I believe) to a system where budgets were defined in cash terms. It focussed the mind not to just accept price rises and really brought spending (in real terms) down – which was the key policy at the time.
Also, (again, hazy memory) prior to EMU Italy made a similar type of change by outlawing (or at least limiting) the use of inflation linked price contracts in order to beat down inflation.
My mobile phone contract is specified to rise at Inflation plus, so does Water, Train travel, some elements of energy costs. Perhaps this needs to change.
BTW the inflation problem in the UK has baffled folk for decades so there is no simple answer.
Thoee do need to change. They are pernicious.
They follow an idea that higher interest rates dampens demand, forcing companies to cut prices to restore demand.
If prices are mainly set by production costs, then this doesn’t really happen much, and higher borrowing costs adds to the underlying pricing, creating the opposite effect.
If sufficient sales can be made internationally, then UK demand also cannot significantly affect prices either.
It’s bad enough that the idea is to cause economic pain on the public to manage inflation. But the reality is that in a globalised market it may cause economic harm while pushing the economy further from the target.
For my own understanding, I find it easier to identify who benefits financially. Based on the list you provided, if we examine it in reverse, it appears that banks and landlords are the ones profiting. Are there any others who might be benefiting as well? If additional parties are profiting, it would suggest that they have more influence over seeking to improve the lives of everyday people.
Rent extraction in all forms is profiting
Stable, Ms Reeves!
I-N-C-O-M-P-E-T-E-N-C-E !
For ordinary folk, this is a disaster.
And a gift to the Far Right.