THE BLOG
02/11/2011 06:11 GMT | Updated 24/12/2011 05:12 GMT

The Government and Bank of England Have Got It Wrong: Interest Rates Must Rise Immediately To Control Inflation

Interest rates must rise by five percent now, not stay low nor creep up a little at a time, or they, and inflation, will be at 15 or 20% soon.

Although the official inflation rate may be around 5%, everyone but the most out-of-touch politician knows that, the reality is that inflation on essentials is far above that. Many basic foods in the super markets have risen as much as fifty percent, cheaper eggs a hundred percent. Home energy is up almost twenty percent, car fuels similarly, public transport also. Even some 'economy' food ranges introduced by the supermarkets have been achieved by making them of inferior quality, so masking the real increase in price. Many aeroplane tickets are up by close to a hundred percent. Cotton clothes, home rent, and basic electronic and electrical goods, washing 'powder', are up about 20%. One wonders just what, apart from unsustainably low interest rates and mortgages, is keeping official inflation figures suppressed.

The argument that the pound must be kept weak to boost exports is a fallacy.The days when Britain was "the workshop of the world", have long since gone. Then we produced many of the raw materials and the components, as well as the finished product, and the machinery to produce it all. Now, most of our exports are assembled out of imported components and the few raw materials we use are also imported. Having a weak pound makes the component cost too high, so making the export cost high.

Furthermore the costs of imports are rising. Particularly of items from China and India, where, as I have always argued will happen, wage inflation is massive as workers covet Western lifestyles and living standards...This is true of raw materials, components and complete products. It is also true for foodstuffs.

The weak pound is fuelling inflation which in turn is fuelling wage increase demands. These wage increases are further pushing up costs making British exports less competitive. To increase interest rates now will strengthen the pound, hence reduce the cost of imports, and quell inflation and dampen wage demands: otherwise the upward spiral will accelerate.

So much of our food is now imported instead of produced here. British agriculture is capable of much more, but unfair restrictions imposed by Europe and the disastrous agriculture and property policies of the Labour governments for the last thirteen years, with agricultural land prices vastly inflated by trophy estate buyers and speculators for development, so the consumer is now suffering the consequence with high food prices. Although the introduction by supermarkets of some budget ranges, particularly of processed foods, has hidden the true increases in food prices and affected the overall rise in food price inflation, the massive rise in the costs of some foods is stark; most notably fruit and vegetables (whether fresh, frozen or juice),pulses, nuts , oats and bread, eggs, milk and cheese, honey and sugar, juices and pop.

The alarming announcement of another package of quantative easing smacks of a panic measure because for some reason there has become a mental block amongst politicians and economists against increasing interest rates; largely because of their obsession with the property market.

The argument of further repossessions in the property market is both real and spurious. However, most people will have bought their property with a mortgage before the interest rates fell so low; they had therefore taken out their mortgages affording higher interest rates. Anyone who has taken out a mortgage since rates fell this low, should have had the common sense to realise that rates will rise and so only have taken a mortgage having calculated that they can still afford it when interest rates rise to more usual levels; if not they were irresponsible - as are the politicians and economists who have failed to warn them of this.

It is also necessary to increase interest rates to calm the insane prices still being paid for property. I have not heard a single politician act responsibly and tell people to stop paying these inflated house prices. To the contrary, they are talking of kick-starting the property market and encouraging people to buy! By so doing, they are leading people to get into negative equity! The constant suggestion by politicians and economists alike, that rising house prices and sales are an indicator of an improving economy, is fanciful in the current state of affairs! Raising property prices and sales right now are an indicator that the faults in the economy are still there and we are heading towards a bigger catastrophe.

A rise in interest rates will give savers, particularly pensioners, an income again from their savings, and so boost spending. It is essential too, so as to lower the cost of imports and so alleviate the pain on Britons by lowering the cost of food and energy at the very least.

So, interest rates must rise five percent immediately to support the currency and ease the pain for British consumers and manufacturers alike.

David Cameron has said that it is necessary to focus on fighting the fire when the house is burning; he would do well to do so instead of ego trips of interfering in Libya and elsewhere during which he has taken his eye off the ball of the British economy. He would also do better to concentrate on the mess in the British economy than criticising the Eurozone , much as he must keep an eye on it as far as it affects Britain. Inflation is running amock. Monetary policy may be supposedly the responsibility of an independent Bank of England, but right now the Bank and the Government must work together to increase interest rates.