4 ms·

I don't see how raising interest rates is supposed to affect supply-side price increases. For example, people may choose to save their money, or not borrow (gi

I don't see how raising interest rates is supposed to affect supply-side price increases. For example, people may choose to save their money, or not borrow (given higher interest rates), instead of buying fuel, but that is unlikely to affect it's price. This seems more like an attempt to strangle wage increases.

spaceman_2020 4y ago
The goal is to disincentivize people from speculating, especially in the housing market. Low rates -> more money flowing into housing markets -> higher rents
mmarq 4y ago
The point is to cool down investment and maybe to manufacture a small recession to reduce inflation expectations. Another point is to show that the Bank reacts to inflation, so that people (such as the Trusses of the world) know what happens if they decide to contribute to an inflationary spiral.
Maakuth 4y ago
Supply and demand at work. If there is less demand of fuel, it's price goes down, if everything else stays the same. Certainly everything else does not stay the same, but at least partially the price increase pressure is alleviated.
- jacknews 4y ago
  Globally, perhaps, but even then supply is, let's say, constrained, currently, and can probably be further constrained to meet demand. I don't see Russia altering their output to accommodate UK consumers becoming poorer.
WhiteOwlEd 4y ago
It seems like it rate hikes would reduce demand, and I think policymakers believe a reduction in demand will force the price reductions. For example, in the US, recent interest rate hikes led to even larger mortgage rate hikes. The increase in mortgage rates had the effect of making it more difficult for people to afford homes. Once mortgage rates started rising here, I started to see a reduction in homes sold and it has started to lead to a slight reduction in home value.
- starkd 4y ago
  I've noticed more for sale signs popping up. Homes were being snatched up before they even had a chance to put a sign out front, but now it takes a little longer. Home prices were getting out of hand.
starkd 4y ago
Federal Reserve has limited options to deal with inflation. It all boils down to too much money chasing too few goods. The Fed Funds rate is an awkward tool, but the only option once inflation gets out of the bag is to suppress demand. Inflation can be far more destabilizing than unemployment. Of course, it would be nice if the congress could excercise prudent fiscal policy.
aluket 4y ago
I’m by no means an expert but could raising rates increase the strength of the pound, which could have a deflationary affect on import prices, including energy?
- simonh 4y ago
  Not if everyone else is increasing interest rates as well, which they are. It mitigates the pound losing relative strength though.
throwaway4aday 4y ago
> This seems more like an attempt to strangle wage increases. It is that and more. There aren't many levers to pull but one that is available is interest rates which in a kludgy way allows you to slow down investment in businesses which in turn results in preventing wage increases, hiring, and eventually results in an increase in terminations or eliminating positions. Less money going to workers means less money can be spent in the economy and less demand for goods and services. Inflation then drops or depending on severity bursts some bubbles and enters into a deflationary period. So yes the whole point is to cause painful decreases or elimination of wages.
- krageon 4y ago
  You're arguing for trickle down economics, which is a hilarious fantasy made up by very rich people so they have an excuse to dodge taxes. Nothing says that less investment in business means preventing wage increases or anything else you've mentioned.
  - throwaway4aday 4y ago
    That is not trickle down economics. If you make it harder to do business by making loans more expensive then businesses will slow growth or make cuts. Slowing growth means you hire less and cost cuts usually involve eliminating personnel. Do that on a large scale and you increase unemployment and high unemployment produces an atmosphere in which people become more bearish and spend less thus eventually reducing inflation. This isn't the first time we've done this but since you aren't clear on the definition of trickle down economics I don't expect you to know that.
- simonh 4y ago
  People are going to get hurt whatever you do. Inflation driving up wages is going to suppress investment and hurt jobs as well. Arguably increasing interest rates suppresses all forms of investment, and thus demand. High wage increases not only directly feedback loops into higher inflation due to higher labour costs, but also specifically hits employment.
kqvamxurcagg 4y ago
There is no such thing as 'supply-side price increases'. There is the market price. And the price comes down if demand is supressed. The issue right now is that demand is actually being ENCOURAGED by low interest rates and continued quantitative easing. Don't be fooled, 2% is still a low interest rate historically speaking. Basically spenders need to be encouraged to save.

spaceman_2020 4y ago

The goal is to disincentivize people from speculating, especially in the housing market. Low rates -> more money flowing into housing markets -> higher rents

mmarq 4y ago

The point is to cool down investment and maybe to manufacture a small recession to reduce inflation expectations. Another point is to show that the Bank reacts to inflation, so that people (such as the Trusses of the world) know what happens if they decide to contribute to an inflationary spiral.

Maakuth 4y ago

Supply and demand at work. If there is less demand of fuel, it's price goes down, if everything else stays the same. Certainly everything else does not stay the same, but at least partially the price increase pressure is alleviated.

jacknews 4y ago
Globally, perhaps, but even then supply is, let's say, constrained, currently, and can probably be further constrained to meet demand. I don't see Russia altering their output to accommodate UK consumers becoming poorer.

WhiteOwlEd 4y ago

It seems like it rate hikes would reduce demand, and I think policymakers believe a reduction in demand will force the price reductions. For example, in the US, recent interest rate hikes led to even larger mortgage rate hikes. The increase in mortgage rates had the effect of making it more difficult for people to afford homes. Once mortgage rates started rising here, I started to see a reduction in homes sold and it has started to lead to a slight reduction in home value.

starkd 4y ago
I've noticed more for sale signs popping up. Homes were being snatched up before they even had a chance to put a sign out front, but now it takes a little longer. Home prices were getting out of hand.

starkd 4y ago

Federal Reserve has limited options to deal with inflation. It all boils down to too much money chasing too few goods. The Fed Funds rate is an awkward tool, but the only option once inflation gets out of the bag is to suppress demand. Inflation can be far more destabilizing than unemployment. Of course, it would be nice if the congress could excercise prudent fiscal policy.

aluket 4y ago

I’m by no means an expert but could raising rates increase the strength of the pound, which could have a deflationary affect on import prices, including energy?

simonh 4y ago
Not if everyone else is increasing interest rates as well, which they are. It mitigates the pound losing relative strength though.

throwaway4aday 4y ago

> This seems more like an attempt to strangle wage increases. It is that and more. There aren't many levers to pull but one that is available is interest rates which in a kludgy way allows you to slow down investment in businesses which in turn results in preventing wage increases, hiring, and eventually results in an increase in terminations or eliminating positions. Less money going to workers means less money can be spent in the economy and less demand for goods and services. Inflation then drops or depending on severity bursts some bubbles and enters into a deflationary period. So yes the whole point is to cause painful decreases or elimination of wages.

krageon 4y ago
You're arguing for trickle down economics, which is a hilarious fantasy made up by very rich people so they have an excuse to dodge taxes. Nothing says that less investment in business means preventing wage increases or anything else you've mentioned.
- throwaway4aday 4y ago
  That is not trickle down economics. If you make it harder to do business by making loans more expensive then businesses will slow growth or make cuts. Slowing growth means you hire less and cost cuts usually involve eliminating personnel. Do that on a large scale and you increase unemployment and high unemployment produces an atmosphere in which people become more bearish and spend less thus eventually reducing inflation. This isn't the first time we've done this but since you aren't clear on the definition of trickle down economics I don't expect you to know that.
simonh 4y ago
People are going to get hurt whatever you do. Inflation driving up wages is going to suppress investment and hurt jobs as well. Arguably increasing interest rates suppresses all forms of investment, and thus demand. High wage increases not only directly feedback loops into higher inflation due to higher labour costs, but also specifically hits employment.

kqvamxurcagg 4y ago

There is no such thing as 'supply-side price increases'. There is the market price. And the price comes down if demand is supressed. The issue right now is that demand is actually being ENCOURAGED by low interest rates and continued quantitative easing. Don't be fooled, 2% is still a low interest rate historically speaking. Basically spenders need to be encouraged to save.