Interest rate hikes do not combat inflation

As Alpesh Patel pointed out on BBC Business News during the week. the use of lending rate to damp down inflation has failed. What is likely to be more effective is to reduce spending power by raising tax rates, but no politician dare do this.

It was good to hear a trained economist confirm what this non-economist had long suspected. I would go further and suggest that raising bank lending rate increases domestic price inflation in the short term as those entities having to pay more in interest will pass the cost on to consumers.

If the conventional economic theory of the Phillips Curve ever worked, it was by slugging an economy, stifling investment and throwing people out of work so that less money circulates. But it seems to me that each application of the interest rate shillelagh makes succeeding inflation incidence worse as indebted companies are driven out of business leaving fewer providers in the market.