According to energy expert Mike McWilliams at the Centre for Economics and Business Research, the price of fuel at petrol stations will fall later this year but the cost of heating our homes will stay high for years rather than months.
Rising energy costs are one of the main factors pushing inflation towards the 8 to 10 per cent mark, and the reason why rate rises will remain ineffective in bringing it back down to a desired target of around 2 per cent. They aren’t the right medicine for these external forces. Rate hikes can of course do some good by suppressing price rises elsewhere, but tightening has to be done carefully given the potential to tip us into a recession.
While those rate hikes are slowly dripped onto the market, inflation could yield wins for some parties – shrinking the value of debt and increasing the government’s tax take due to frozen thresholds. And we might all reduce our usage of polluting fuels.
But mostly, inflation is damaging. It erodes our purchasing power, devalues our savings, lands us with extortionate energy bills and can lead to weaker returns from our investments as companies bear the brunt, too. Inflation and a tightening cycle add to uncertainty about the future and depress economic activity as businesses become nervous about investing and about consumer spending. And even if inflation has largely been under control for years – Credit Suisse’s 2022 study of global investment returns shows that between 2014 and 2019, out of 21 major countries, 17 had inflation rates below 2 per cent – no one can afford to disregard the threat it poses. The consequences of an inflationary spiral are too great for that.