UK Politics
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Can someone smart explain this to an A-level econ student?
The inflation we're seeing is mostly imported cost push, from rising energy prices, cost of raw materials ect, which interest rates should have marginal impact on, no?
The IR is used to impact AD and change demand pull inflation, and is risen to lower investment and consumption and therefor DP inflation, which appears to already be very low.
Why is the BoE increasing IR to counter inflation that isn't demand driven? Is it just to make it look like they're doing something or am I dumb?
An answer from my wife who works in UK finance and spent the better part of the day dealing with this decision:
_The short answer is, this is still the best tool they have to deal with inflation, but it's a blunt tool.
A lot of the inflation is driven by external factors, but part of what they're trying to do, it prevent an inflation spiral where higher energy and food prices feed into a higher cost of other goods... labour... Etc.
Q: Will it work?
Her A: At this point they are very late [as others have said here] and increasingly looks like the only way this works is if they hike rates to a level that forces a recession [yay /s]._
@BenGFHC
They only have one button. Their choice is to press it or not press it. So they press it when inflation is high. You could get a robot to do it. They know it won't work, might even make it worse, but they have no other buttons to press.
Maybe if mortgage payments are twice as high people won't be able to spend as much on anything else and inflation will fall just because less is being spent on food etc??
I'm not clear on how the inflation stats work when modelling the amount of items people buy Vs the price of the basket.