Can someone explain how increasing interest rates helps to tackle inflation?
A Google search tells me: “Higher interest rates make it more expensive for people to borrow money and encourage people to save”, but how can you save more if your mortgage goes up and the price of goods and services is running away at an alarming rate?
The Bank of England’s website tells me: “If, people on the whole, spend less on goods and services, prices will tend to rise more slowly. That lowers the rate of inflation”.
To me as a layman, this makes no sense - if demand is reduced due to people having less disposable income, companies - who also have their own borrowing costs - will surely increase the price of their products to maintain their income stream. How can we stimulate the manufacturing, agricultural and retail economies if people are being deterred from consuming more?
Apart from borrowing costs, the current energy crisis is pushing up business production costs, which again are passed on to the consumer. A prime example - as borne out by a staggering rise in food inflation – might be dairy, where farmers are seeing their overheads to run their milking machines going through the roof.
The way that the Bank of England responds to all of this needs a serious overhaul, but they only seem to have one item in the tool box. These are not normal times, and outmoded fixes simply won’t work.
We all know that the root cause of this crisis was sparked by a war leading to a massive shift in the energy market. And then Liz Truss and Kwasi Kwarteng sunk the economy and the pound with their over-zealous ‘reforms’. I don’t even blame them - I blame the dinosaurs running our economic institutions to protect the interests of the elite.
At my most cynical, I’m sure there were machinations behind the scenes to deliberately make Truss and Kwarteng the fall guys to justify bleeding us dry in order to pay for the cost of Covid. The government had always previously cried poor to properly fund the NHS and, actually, pretty much everything else - so where was the money going to come from to regenerate the coffers?
Cue you and me.
They needed to capitalize on a demand that, unlike food and luxuries where people could tighten their belts, was essential to the populace - fuel and energy. I don’t have the answer as to how this feeds back to the government but, in my view, inflation will never come down while we’re being held to ransom by oil and energy producers and the politicians who are in their pockets.
Feel free to enlighten me or contribute in 'Comments' below.
