Interest rising exacerbates existing cost of living crisis problems. So, how do we bring it down?
The standard tool is raising interest rates, which The Bank of England describes as the “best approach”.
“In short, higher interest rates will work because they will mean that less money will be spent in the UK (than if interest rates had not changed),” they explain. “When overall spending in the economy falls, price rises slow down. And this brings down the UK’s inflation rate.”
But this technique won’t work, says Danisha Kazi, a senior economist at economics campaign group Positive Money. This is because the current surge in inflation is caused by global supply chain disruptions, rather than by domestic spending.
“Interest rates are very blunt and ineffective tool, so they just do not address the sort of drivers of the kind of inflation we’re seeing at the moment,” Kazi said.
“It is driven by external forces, mainly climate change, and supply chain disruptions to our heavily fossil-fuel dependent system.”
The war in Ukraine has caused a significant drop in Russian gas supplies, which led to higher gas prices. Meanwhile climate change has disrupted agriculture, raising food prices and driving energy costs higher as demand for heating or cooling spikes.
Raising interest rates won’t tackle these problems, Kazi said.
“Conventional economists, people in power at the Bank of England and in government, are really attached to these old ideas of the tools that used to work for them. They’re just not willing to see that the climate has changed, and that the economic conditions have changed,” she added. “These tools don’t work anymore… we need to be bold and imaginative.”
Hiking interest rates can also “hit the most vulnerable hardest”, she warned. Higher interest rates disproportionately affect people on variable-rate mortgages, loans or credit card debt. Those already struggling financially may find their budgets stretched further. And landlords facing higher mortgage payments may pass on the costs to renters.
So if raising interest won’t work, what should the government and the Bank of England do?
Investing in green infrastructure will address the supply-chain bottlenecks, Positive Money argues, reducing our reliance on the costly fossil fuels that drive inflation.
“We need to see them looking at different ways to support the transition to clean energy and climate mitigation measures,” Kazi said.
Bringing inflation down is not the only way to meaningfully improve people’s lives. For example, inflation has dropped significantly since the 10% highs seen in 2022. But people are still struggling, because the decrease has not trickled through to greater spending power.
“Stats out this week show the rate of poverty in the UK is higher than at any point in the 21st century,” said Tom Pollard is head of social policy at the New Economics Foundation
“The failures of the last government have made the cost of living crisis more painful than it needed to be. Failing to guarantee an adequate social security system means low-income households have been hit hardest. Failing to invest in home insulation, wind or solar power has left us vulnerable to soaring energy bills.”
To ‘turn the crisis around’, Labour must ensure wages rise and reduce our reliance on costly fossil fuel energy.
“The new government must make life affordable for all of us,” Pollard said. “[They can do this] by guaranteeing a minimum level of income that is adequate to afford the essentials, investing in insulation and renewables, and ensuring that public services can help all of us to meet our basic needs.”
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