Truly. something of a blow:
The Bank of England has been forced to revise up its inflation forecasts as surging energy costs, labour shortages and chaos in the supply chain hold back Britain’s recovery from Covid.
Inflation will rise above 4pc and stay there into the middle of next year, the Bank of England warned, meaning prices will be climbing more than twice as fast as its 2pc target.
It suggests that policymakers may raise interest rates faster than previously expected in a bid to tame rising prices.
Just, for a moment, assume all this is true. Inflation is to move to 4%.
Firstly, this tells us that real interest rates are indeed changing. As opposed to the recent insistence that interest rates haven’t changed in yonks.
But more fun here. So, the MMT view, as from the Sage, is that interest rates cannot rise as everyone will go bust. It’s not possible to reverse QE to suck money out of the economy because that would be to, umm, suck money out of the economy. The only correct response is to increase taxation.
Which gives us two questions. The first is, well, what tax rate, upon what, reduces the inflation rate by 2%? We’d like to see the calculation please. Second, do the political incentives work? We all know that politicians love to spend and hate to tax because that’s the way electors like it. So, given the three choices, reverse QE, increase interest rates or increase taxes, which will politics deliver to us?
My bet is that if taxes are the only possible solution then politics will leave the inflation to run.
But Sage, what say you?