This is what happened over the past decade. Low rates encourage individuals, companies and countries to borrow, and to spend, boosting economic growth. Thus, when inflation falls below the central bank’s target, which in most developed countries is set at 2%, interest rates come down and stay down. Most economists regard the interest rate solely as a policy lever to be used for controlling inflation. To go deeper For a great historical perspective on inflation read The Great Inflation and Its Aftermath: The Past and Future of American Affluence by Robert J Samuelson (Random House).Įconomic historian and author of The Price of Time: The Real Story of Interest ( Allen Lane ) No central bank by itself can do much about this, except through lowering growth and possibly bringing about a recession – or even depression. The problem now is that demand-pull inflation, which we experienced when Covid restrictions were lifted and the economy surged, has turned into cost-push inflation, determined not by wage growth but by the war in Ukraine, which has sent energy and food prices soaring. The French, for example, have forced their energy companies to keep electricity price increases to households to no more than 4% this year, which has kept inflation lower in France than in other European countries. When it gets too high, there are various measures they can take, including raising interest rates, reducing money supply, raising taxes to contain spending or implementing a prices policy to keep certain prices at least under control. The latter happened at the time of the two oil crises of the 1970s, and it’s happening again now.Ĭentral banks aim to keep inflation low and steady.
This can happen for a number of reasons: a run on a country’s currency that increases prices of imported goods a large stimulus to the economy when the system is already at or near full capacity a strongly unionised labour force exercising its bargaining power a sudden shortage of labour (following Brexit, for example) or international cost-push factors outside an individual country’s direct control. High inflation means, effectively, that people can buy less with their money.
Inflation is an increase in the price of goods and services in an economy. Chief economic adviser at the Centre for Economics and Business Research and co-author with Andy Ross and Peter Urwin of It’s the Economy, Stupid: Economics for Voters (Biteback)