Foreign Perspectives

In times gone by, getting inflation down was always considered to be a “good thing” and it still is but the problem is that the underlying reasons for inflation these days are quite different from those a few years ago.

Nowadays, inflation is largely driven by the oil price either directly through increasing the cost of your own petrol or indirectly through increasing transport costs generally. More to the point though is that it isn’t driven by the banks handing out money as they used to as anyone who has tried to get credit lately will tell you.

Yet, the Bank of England persist in using interest rates as their seemingly only means of driving down inflation. It isn’t working and it won’t work because it’s not bank lending that’s keeping inflation up (as is clear by the “credit crunch” that we’re all experiencing): it’s the oil price. Even if they took interest rates to 50%, inflation would still remain high.

What those high rates are doing though is killing the economy; they’re certainly not killing the inflation.