What the rise in inflation means and whether it will force the Bank of England to hike rates

What’s wrong with inflation? As reported by the Office for National Statistics, the cost of living reached a 10-year high of 4.2 percent in October.

First things first, markets were expecting a rate hike at this month’s monetary policy committee. Not me. Why? Quite simply – markets often act like flocks of sheep when faced with a determined collie; it is in their nature and often it makes financial sense, until suddenly it is no longer possible and everything falls back again.

Why did I not agree to the market consensus? Also easy – there is far too much uncertainty buzzing around at the moment. The only reason to raise interest rates is to contain inflation by making borrowing more expensive and thereby dampening spending. As a result, prices are falling to stimulate demand for goods and services.

But if your goal is to curb spending to lower inflation, then the job is already done.

Energy prices have skyrocketed in the past few months and almost all households will see their bills skyrocket or see what is fueling inflation. But a rate hike in the UK will have very little effect on global energy prices, which means that this is inflation that the bank cannot control.

There is the employment problem that Andrew Bailey himself pointed out during his MEPs questioning earlier this week. Yes, the October dates look reasonably stable, but things are not all rosy there. There are many vacancies and many job seekers have neither the skills nor the inclination to fill them.

There is the so-called “great resignation”, which sounds like a blast, but it actually is. So much movement in the labor market puts companies under massive pressure, losing employees to competitors and whose remaining employees have to take over their jobs. This may work in the short term, but burnout is also a thing. This also drives up wages when people switch jobs, which further contributes to inflation. How long this will continue is a great unknown.

In a few months, we will all be paying more social security on our incomes, which will curb consumer spending, while corporations will raise corporate taxes, which will also curb their hunger for spending. Against this background, does it make sense to raise interest rates now if the effects will not really take effect until March anyway?

Then you have the saga of the mortgage prisoners – the people who got a mortgage before the credit crunch and who, after a massive crackdown on lending rules, now wouldn’t get a mortgage. They are all stuck with the standard variable interest rate and an increase in the base rate brings them further into financial distress. The banks are effectively letting some of these people already live in houses they are not paying for, under the guidance of the city guard, so as not to repossess their homes. While you can afford it, an increase in interest rates will put pressure on banks to write off their debts indefinitely.

After all, the thing about inflation is that it’s not just our money that is depreciating in value. Our debts are also being devalued, and that is the great unspoken fact. The UK’s national debt at the end of the fiscal year ended March 2021 was £ 2.223 billion, equivalent to 103.6 percent of gross domestic product. If inflation is 4 percent next year, as expected, it will be an effective $ 89 billion in 12 months.

The Bank of England is independent from the government, but central economists will not be blind to this latter consideration. If we are to get the economy back to a “more normal” state, it is crucial to bring this debt value down. The downside is that it will all make us feel a little poorer.

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