It is almost the exact opposite thing that Monetary Policy (traditional economics) says we should do!

Traditionally, the way to fight inflation is to tighten monetary and fiscal policy.

What that means in English is to increase tax, and increase interest rates. Basically, take money out of the economy and make it harder for the population to spend money.

Lower spending leads to lower demand, and so leads to lower prices.

But, we know this won’t work!

Why?

Because the inflation is not led by spending on luxury items, but by imported energy costs which put up the cost of essentials like food and heating!

So, if we tighten monetary and fiscal policy (like we have started to do until today’s mini-budget), all that happens is that people have less money to spend on heating, food, rent and mortgages, and so need higher pay. This, in turn, increases prices and so we start to spiral upwards in terms of Inflation.

What that means is that the very thing intended to curb inflation is in fact the fuel to create inflation… bonkers!

So, what do we do?

The only route is to accept a bit of short term pain on the foreign exchange (FX) markets.

We are getting that anyway, because the usual raising interest rates policy will not work! We need to accept that imported inflation (a weak £ on the FX) is here for a bit… and combat the here and now.

Put more money into people’s pockets… allow them to pay their bills!

So, we actually:

● Cap the cost of heating… yep, done that!
● Reduce fiscal policy (cut taxes)… now they have done that!
● Make investment in business better and more attractive – try to seduce capital into the country. Now they have done that too!

So, it’s risky. Because the FX and £ will get a bit of a kicking, but that also makes our economy look very cheap to international investors.

In reality, the inflationary bubble, whilst very real and very painful, is artificial and there is not much we can do about it.

The least risky option could very well be the most risky as well… Doing nothing or doing the same thing expecting a different outcome is the definition of madness.

So:

Do something and bank on growth to get us out of this mess. And you know what? It might just work!