Friday 22 March 2024

Wielding the hammer. Again.

 

For those who have been battered by the rise in the cost of living recently, the report that inflation is slowing down is good news of a sort. It’s usually better to get poorer slowly rather than quickly, even if that isn’t quite the way in which the government has presented it. Given the unshakeable belief of the Bank of England, and the government, that this fall in inflation is all down to interest rate increases, it means that we should be able to look forward to some interest rate cuts later this year. That will, of course, help the main target group which the government hopes can thus be bribed into supporting it, namely those with mortgages. It won’t necessarily help the poorest of all, but then they tend not to vote Tory anyway.

Economic theory tells us that high interest rates deter people from spending and therefore remove upward pressure on prices, rather ignoring the fact that they also further impoverish those who have little room for discretionary spending in the first place. The problem with the theory is the implicit assumption that inflation is always caused by too much money chasing too few goods and services, but that really wasn’t the cause of the most recent bout of inflation, which had rather more to do with the war in Ukraine and profiteering by energy companies who never let a good crisis go to waste. Still, when the only tool you have is a hammer, every problem looks like a nail, and the Bank of England has bashed away with great enthusiasm at that nail. It now seems to seriously believe that inflation with external causes which would have gone away eventually anyway has actually been vanquished by their demented hammer-wielding rather than by the passage of time.

And that brings us to the sting in the tail. Alongside the half-promise of interest rate relief at some unspecified later date came the warning that inflation might not have gone away yet because the hostile acts of the Houthis in Yemen against shipping in the Red Sea may yet cause a further bout of price rises, as goods either become scarcer, or the cost of shipping them increases. In terms of the threat of inflation, it’s a reasonable fear – but it doesn’t follow that the answer is to continue using that hammer. The mechanism by which high interest rates impact inflation caused by hostile acts at sea is, being charitable, less than entirely clear. It’s not as if the Houthi leadership is looking to buy houses in the UK, and will be deterred from launching rockets by continued high mortgage costs. High interest rates aren’t going to affect the scarcity of goods or the price of shipping them either, merely help to ration them on price. It doesn’t take a genius to work out who loses most from rationing by price.

1 comment:

dafis said...

Looking for any kind of logic - causal or correlation - is a waste of effort. Big business and their collaborators drive inflation and it's been open season for years certainly since the Covid crisis in early 2020. Blaming "something else outside our control" is a phrase much overused in these times. Then putting the oil and gas price madness entirely in Putin's hands is just as bad. It's all a mad merry go round which the government has failed to influence because it too enjoys the inflated proceeds from VAT and other duties. More funds for Treasury to waste and bigger profits for fat cats in industry and institutions to plunder.