Interest rates and inflation
First of all, let’s get some basics together. Reproduced below is The Times ‘explainer’ with my numbering of reasons and highlighting of the players involved:
The Bank of England has warned that it could peak at 13% this year when the energy price cap goes up again. But what is pushing up prices?
Energy bills are by far one of the biggest contributors. (1) Gas prices rocketed as economies around the world reopened after the coronavirus lockdowns. (2) The war in Ukraine has exacerbated the problem.
In April, average gas and electricity prices jumped by 53.5% and 95.5% respectively compared with a year ago. (3) Average energy bills are now forecast to hit £3,850 by January 2023 after Russia cut gas supplies further.
Fuel remains at some of the highest levels seen on record, although pump prices are falling, slowly. Average petrol prices were 182.69p a litre in July . In early June you could expect to pay 186.59p. In May you could expect to pay 160.31p per litre. A year earlier, it was just 130.5p.
Food items such as wheat and oil have also taken a hit. Supply chain issues have been compounded by the Ukraine war in recent months, further impacting our access to supplies.
Analysts warn food prices could rise by 15% this year.
According to the Office for National Statistics, restaurants and hotel prices are also going up.
(4) The rate of VAT (the tax paid when buying goods and services) has increased for some businesses now that a temporary tax cut during the pandemic has ended.
Air passenger duty and vehicle excise duty rates also increased affecting travellers and commuters.
And smaller increases have been seen in items like postage stamps and furniture.
For homeowners, while the Bank of England is attempting to raise rates by cooling inflation, more than a million homeowners are seeing their mortgage rise in response.
Inflation has been stoked up by items 1 - 4 and I list them for clarity: Coronavirus, war in Ukraine, Russia, VAT, and excise duties.
The Bank of England’s unimaginative response is to put up interest rates when the causes are not controlled by anything to do with the UK public or anything that the UK public are able to change by experiencing increased costs for their mortgage, car loans and general levels of indebtedness! Does sucking additional money out of your bank account mean you have any effect on President Putin’s attitude to the world order, the control of an essential recovery after COVID or the imposition of higher taxes and I would include National Insurance in that.
Interest rates are, in my opinion, the bluntest tool any government can use. (Property market 1988 - 1990) They never quite know when to stop applying increases as the lag between raising the rate and seeing its impact is random. You know when you have gone plenty far enough when repossessions start to rise and the benefits budget lurches upwards.
We were until recently in the grip of the greatest threat to our economy: COVID19. Government spent a fortune on keeping people employed, their mortgages paid, companies in business, and in general propping everything up. I don’t disagree that the expenditure needs to be repaid and the coffers re-filled, but don’t use interest rates to take apart all the things you spent so much money preserving!
I’ll be the first to point out that I haven’t proposed a solution and that giving the Russians in Ukraine the biggest hiding they’ve ever had is probably not a sensible solution. So much stems from events that affect our now global economy that the thinking needs to be wider than just one country’s interest rates.
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