Originally Posted by
Keyser Soze
That is because for many years inflation was falling Bob. There was nothing to worry about. The mandate of the Bank of England was to keep inflation at 2% or below, and it succeeded in doing so.
Now that inflation has broken 2% and keeps motoring higher it is now a problem. Initially it was deemed to be "transitory" but that was clearly rubbish. Now that the central bankers can see it is not "transitory", interest rates are moving up to end the problem. This causes pain in the economy and it has to be explained.
Inflation is a monetary phenomenon and therefore requires monetary policy to fix it. The cure historically is to keep interest rates 1-2% above inflation (this is monetary economics theory and backed by data), as this maintains the value of money, confidence in the currency, and hence confidence of external investors to invest in the country / currency.
What we know from history, is that whatever the pain, if a central bank is not aggressive enough, and quick enough, in getting rates above inflation, then inflation becomes stuck in the system and is much harder to remove. Workers demand more pay rises as they anticipate further prices rises, and then companies increase their prices to compensate for it. This causes a wage-price spiral, and higher prices drive inflation even higher, creating a doom loop. See the 1970s and 1980s for evidence of this.
So where I agree with the BoE and Hunt is that they need to get inflation down quickly. But words will not do it - only action will. Those interest rates must be 1-2% above inflation to start taking effect. Until then, expect inflation to keep ripping upwards.