Energy prices and interest rates
The Monetary Policy Committee of the Bank of England raised interest rates yesterday, the first increase in two years. Wiith energy prices rising in Britain, there is greater threat of inflation, which the Bank hopes to head off at the pass. The BBC report is here.
The BBC’s economic correspondent Evan Davies explained the process in very simple terms on last night’s BBC1 news: Increased demand for air-conditioners in Britain leads to increased production of air-conditioners in China, and this extra volume of production leads to falling prices for air-cons and thus further increased demand. However, the increased production volume also leads to increased energy use in China, which in turn pushes up the price of energy.
Of course, this simple model assumes a single energy market joining Britain and China, which is far from the case. But, for many other reasons, energy prices have risen in Europe and the threat of inflation is certainly present.