Money
Paul Lewis on the web
Inflation: pity the poor Bank of England
The Bank of England has a problem. Inflation is rising. Its job is to control it. Normally it would raise interest rates to make borrowing more expensive. That would dampen down demand. And prices would fall. That's the theory. And for ten years since the Bank was given the job of controlling inflation it worked. But not any more, says Paul Lewis
This week the inflation figures showed another rise. And forget the 2.2% of the consumer prices index. Look instead at the 4.1% of the Retail Prices Index, the RPI, which we have watched for 50 years. It has been at 4% or more for 12 of the last 15 months and never dropped below 3.8%. You have to go back to 1991/92 to find anything similar. And then inflation was falling. Now it's rising.
The Governor of the Bank of England has warned it could get worse. Three weeks ago he said that inflation could rise well above its target this year. Indeed he warned it might miss its target by such a wide margin he would have to write and explain himself to the Chancellor. Perhaps twice.
Behind the Governor's warning lies a subtle change in policy. Instead of raising interest rates to damp down inflation the Bank is cutting them to boost the economy. That was why it cut rates again last week to encourage businesses to borrow more and do more. The Bank has decided to let the demon inflation out of its bottle to try to avoid the devil of recession.
But it could be doing that at just the wrong time. International pressures are pushing prices up in ways the Bank cannot control. Demand for food is rising worldwide allowing farmers to charge more. The rising price of oil and gas has pushed up domestic energy costs by 15% in the last month so it now costs more than £1000 a year to heat and light a home. And that has also led to petrol costing more than £1.05 a litre and diesel to hit the symbolic £5 a gallon. Which means the cost of almost everything we buy that moves by road is likely to rise.
So just when inflationary pressure is strong the Bank is loosening the control it has on prices. The people who suffer most as the cost of essentials like food and fuel rise are those on low fixed incomes. And it must be hard for the MPC – whose lowest paid member gets £117,000 a year for working three days a week – to understand the struggle that many people face.
