Did an economics A-level about 20 years ago so that's the extent of my knowledge.
First of all I understand how increasing interest rates generally can act to reduce demand therefore cooling inflation. However what I can't get my head around is how it helps in an energy crisis?
I read today that the bank of england stands ready to increase interest rates if inflation spikes but I don't get why? Fuel / energy is used in everything we consume so if the cost of this goes up, then prices go up regardless of whether the base rate is 1% or 100%.
I understand that if everyone had easy access to cheap loans giving them immense purchasing power, then playing with the interest rates would be quite effective. However when it's energy led and consumers don't have excess purchasing power then how does it help.
furthermore, as I understand it, the UK is quite a debt ridden country so surely if interest rates go up, this then gets passed on to the consumer. e.g. a builder has a mortgage, his mortgage rate goes up, he has to charge more per hour for his work.
Given also that we have poor growth, inflation will just stop people spending and send us into another recession. It feels like using interest rates to control inflation is just slowly choking the country.
How does increasing interest rates fight inflation fuelled by energy crisis?
byu/RoverTheMoob inAskEconomics
Posted by RoverTheMoob