To not understand why the answer to inflation is to raise interest rates?

[BluebellBlueballs]

Is it to make everyone so poor due to mortgage rises that they cannot afford to buy as many things?

There's a lot of middle ground between taxing the likes of JRM realistically and communism, you know.

It’s bull shit - it doesn’t work for supply side inflation - which is what we have.

they can’t admit the truth which is that it’s their policies which caused it so they’re deflecting.

Is it quantitative easing that caused it?

I thought everyone knew printing money never works in the long term

It’s not the only tool - you can do stuff through government spending (fiscal policy) as well. I used to think that changes in interest rates (monetary policy) made sense, but this time round all I see it doing is concentrating wealth in the pockets of bank executives and major investors and not helping most of society at all.

I’m in Australia and the governor of our Reserve Bank (responsible for monetary policy) has said that if mortgage holders are struggling they can get better jobs or work more hours, which apart from being stupid is completely illogical because if people get paid more they’ll keep spending, and defeat the purpose of the rate rises, won’t they?!

I’m sure you’re right although I think the BoE only has one thing they can do so they respond, so tasked with trying to slow inflation they’ll use it

Could you say what fiscal policy is a good idea? I’m not really up on the things that can be done, just out of interest

I’m not sure about the approach, if it it does nothing for supply side inflation, but I assume BoE have reasons

Absolutely. The interest rate rises are happening because that's the tool available, not because they're a solution. There are lots of people who simply can't skim any fat off, and lots of others who don't need to.

There's also the point that we have an employees market at the moment, so lots of people are able to negotiate higher wages. And even those who can't are more likely to be able to work as many hours as they want, get second jobs etc than they would've a few years ago. So there are more of the working age population who are in a position to increase their incomes. Not everyone can do this of course, but if you have eg 20% of workers (figure pulled out of air) who can respond to inflation by earning more rather than consuming less, that obviously has an impact.

@SunnyEgg you’re right, I misread your “they” as meaning “everyone in charge” when you meant the central bank; thanks for clarifying your point 😀

I actually don’t know what would be generally accepted as a good idea in terms of fiscal policy. Governments are reluctant to cut spending because it’s unpopular and they usually cut the wrong things, like social security. From what I’ve read, I think this current inflation is driven by profit seeking by business, rather than individual spending by consumers, but I’m no expert.

Personally I would like our successive governments to stop making external consultants and defence contractors disgustingly rich, and to tax the obscenely wealthy, but that is pie in the sky thinking obviously 🙄

I don't think the governments responsible for continually doing this over a decade were thinking too much about the long term.

100% this. It’s a blunt tool that isn’t working because inflation was supply sided, post pandemic and post Brexit consequence. Not to forget the Liz Truss disaster.

There are so many wealthy older people out spending, having 10% + increases on pensions and now enjoying good rates of interest on their savings = getting richer. They are not going to stop spending. It’s also causing huge wage increases in the private sector.

Working age people and especially public sector and lower paid private sector employees (ie those with low bargaining ability on below inflation pay increases) are being absolutely ruined by the hike in the cost of living and now mortgage and rent increases. It’s totally unfair and it’s not working anyway. The problem we have is the BoE are all Tory appointed plants, inexperienced and biased.

I’m in Australia and the governor of our Reserve Bank (responsible for monetary policy) has said that if mortgage holders are struggling they can get better jobs or work more hours, which apart from being stupid is completely illogical because if people get paid more they’ll keep spending, and defeat the purpose of the rate rises, won’t they

That sounds familiar.

And that does not make sense - if the aim is to reduce the amount of money people spend, then encouraging them to get better jobs will lead to them having more money to spend.

And I hear talk of tax cuts from Tories - same idea - people will get more money to spend.

So is it about encouraging people to save by increasing savings rates?

Yes, it's just not realistic to expect people who have disposable income to stop spending it on things they want, that they feel will make their lives better. Especially not after the three years we've had. Inflation is a policy that provides some people with more discretionary income.

I agree with a pp who said the aim may well be recession, as that tends to panic people and incline them to spend less.

I think most people are used to spending a chunk of money on non essentials. Hairdressers, mobile phone contracts, PCP car lease, holidays, new clothes annually, TV subscriptions, new furniture, extravagant Christmases, pets etc.
There must be few people who don't spend on at least some of these, even people who are poor enough to receive state benefits.

Our idea of what is essential is very different to 50 years ago (you will now get a load of people saying that they will lose their job if they can't have a haircut every 6 weeks etc).

That would be a logic fail here because even the best savings rates are still much lower than inflation. People who already had the savings are better off, but it's not an incentive to anyone else to build up cash reserves. Is it the same in Australia @cakeorwine?

Big investment in public services would be a good idea. This is what Labour did after the second world war with the introduction of the NHS, big housebuilding schemes etc. Although with the lack of people wanting work I guess this would have to go with an increase in immigration (which is already at record high levels) so it wouldn't be popular with your average Tory voter!

I live in a country with 10% inflation, but interest on savings is still 0%, maybe 1% in one or two banks.

This is interesting from Canada:
Raising interest rates won’t solve inflation. Here’s why. | Canadian Union of Public Employees (cupe.ca)

It’s not working because companies are profiteering. That’s been proven. They’ve raised prices but also profits- therefore the price rises are not solely being driven by increased costs as they’ve claimed. Raising interest rates to reduce spending is affecting us as consumers disproportionately, when really we need to be focussing on businesses who are driving inflation (and also driving rising inequality)

I don’t know anyone who spends money like that.

Clothes are made badly so don’t really last long
Phones are kind of essential.
We went on holidays in the early 70’s, and we had a pet. My dm was a widow with 3dc. We were not rich. But we had everything on there except car lease. Mum bought one.

But businesses can only profiteer because there are still lots of people flush with cash and willing and able to pay higher prices. That's exactly why interest rates are going up.

Essentially, this. Resources are short compared to the population, and this is the only tool in the modern armoury. Producing more, as is often stated in respect of the housing crisis, isn’t easy - there are finite limits on land and energy and both come with huge environmental costs. The idea of limiting what the richest can take out of the system (ie reducing profits) is absolute anathema to the modern political system of the west. Still fools defend private profiteering and population growth.

We obviously move in different circles but round here hairdressers are one of the few shops left on the high street so they must be doing well. I don't think I know many women who don't use hairdressers. People even take toddlers to the hairdresser!

Car ownership and usage has gone up ten fold since the 70s.

Also disagree on the clothes. Quality is good enough to last a few years, even Primark stuff doesn't fall apart within a year. Fast fashion is a big sector in our economy.

That is a great article @Gwenhwyfar . I particularly like the idea of responding to inflation with policy, instead of austerity/ rate rises - the example of responding to increased cost of fossil fuel by making it easier to get around by other means (public transport, EVs powered by rooftop solar or large solar projects) is v clever.

@StormShadow that was me posting about Australia, and yes, interest rates on deposits here are way, way lower than inflation. There is no way that rate rises will encourage anyone to keep money in the bank.

They are profiteering on essentials like food and energy. Interest rates are absolutely not going up because the nation is flush with cash.

And banking. Banks not passing on interest rate rises. Look at companies with largest profits in UK, it’s things like energy, food, consumer goods, banking. Not things we have much of a choice about.

Ah ok. I'm not surprised. If anything, trying to get people to save their disposable income rather than spend it potentially leads to people looking to invest it in other ways, in those circumstances.