Inflation is on the rise and in an election year, there’s very little politicians can do
, will have limited and short-term impact. If not offset by adjustments elsewhere, they will add to – not reduce – demand, increasing price pressures and may worsen public finances.
Increasing interest rates is problematic. With inflation high, to be effective, central banks would have to rise sharply – by at least 4 to 5% – to normalise real interest rates., such increases could trigger lower real estate and share prices, far beyond the relatively modest corrections experienced since late 2021. It would also increase interest expense on the high level of government, business and household debt, especially mortgages.
Financial distress for over-stretched borrowers risks a new financial crisis. This means any rate rises will have to be carefully calibrated to avoid side effects, limiting their efficacy.Policy options on the supply side are limited. Financial finagling cannot control the pandemic, eliminate extreme weather, increase production of goods and services, or bridge geo-political divides. Governments can help expand essential infrastructure and correct workforce shortcomings but it will take years.
Finally, while paying lip service to price stability, government and central banks may have a higher tolerance for inflation for several reasons.which could damage a debt-laden economy. Higher prices boost economic activity by encouraging consumption as buyers accelerate purchases fearing rising costs. Inflation is also helpful in dealing with the high levels of borrowing. It increases tax and business revenues to help meet debt repayments.
With wages unlikely to keep pace with this increase in prices , the cost of living crisis is unlikely to abate soon, hurting ordinary households and exacerbating inequality, irrespective of who voters put in charge.
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