How do rising interest rates fight inflation? ‘Deeply disturbing’ | Personal finance | Finance

Inflation in the UK is currently at its highest rate in 40 years, with millions of Britons struggling to get by due to high costs and stagnating wages. The Office for National Statistics confirmed that the rate had risen slightly to 9.1% in the year to May, from 9% in April, causing further misery for consumers and businesses.

Fuel and energy prices are the main drivers of soaring inflation, but food and household goods prices have also risen this year.

The Bank of England has warned that the pain is far from over, with further hikes likely to take the rate to 11% in 2022.

In response, the Bank of England has been gradually raising interest rates since late 2021 as the cost of living crisis took hold.

The rate was previously at an all-time low of 0.1% due to the coronavirus pandemic.

READ MORE: Gregg Wallace finds out how families’ budgets are gobbled up

When interest rates are low, inflation tends to rise, and when interest rates are high, inflation tends to fall.

Theoretically, rising interest rates deter people from borrowing money, which means consumers and businesses will spend less and so the high demand for products naturally decreases.

But it is not necessarily infallible. Stagflation is the term used for an economy that has high prices and stagnant wages, which means that the purchasing power of your wages is eroded.

Stagflation is a misnomer among economists and is extremely damaging to household finances, and the crisis puts the Bank of England in a particularly precarious position when it comes to tackling the problem.

Tina McKenzie, Policy and Advocacy Chair of the Federation of Small Businesses (FSB), said: “The Bank of England has recently used the word stagflation in relation to the current economic crisis, which is remarkable and deeply worrying. .

“It’s a scary moment. It’s hard to overstate how devastating current levels of spiraling inflation are for both businesses and consumers, and the longer this continues, the worse the damage will get.

“The Bank is bound to try to contain inflation, although there are question marks over what it can actually do, given that many of the factors driving inflation, the war in Ukraine over oil prices, are beyond his control.”

Ms. McKenzie continued: “The government must act now. A further reduction in fuel taxes, or even a reduction in fuel VAT, would help ease the pain.

“More broadly, a reduction in VAT would give a real boost to the economy, and would be a lifeline for countless companies in difficulty. At the very least, reducing the VAT on energy would offer real help.

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