Inflation has today risen to 3.3% from 3% last months. This is 1.3% above the government's target.and is 1.2% up on last year. However, in the Monetary Policy Committee's own report they state that 1.1% of the 1.2% inflation rise in the last 12 months is down to rises in electricity, gas, petrol, oil and food. In effect, the MPC admits that the rise is because of a rise in the prices of the basic necessities of life and not because of extravagant spending.
So why are the MPC talking up the prospects of having to raise interest rates again ?
It is an absurd situation that an economy which looks to be heading for a recession might be tipped over the precipice because the MPC might raise interest rates in order to stop people spending money on luxuries when the MPC's own figures show that only 0.1% of the rise in inflation is down to spending on non essentials.
It is a crazy state of affairs when the answer to people spending money on essentials like fuel and food (which are the items that are rising in price) is to hit them harder in the pocket by raising interest rates so they pay more on their mortgage. Will this mean that they spend less on food and oil ? No. Will it mean that they spend less on goods and services that might keep the economy's head above water in a time of troubles ? No.
We are in for a heavy landing and the MPC appears to be doing nothing to help.
The truth is that what the economy needs is a cut in interest rates. A rate cut will not lead to more inflation because inflation is being caused by external factors beyond the reach of our domestic interest rates. Interest rates are a blunt weapon which have no effect on the causes for inflation but will hurt every home owner.