I wrote this tweet yesterday:

Suppose we have now the best inflation apart from Argentina and South Sudan as a result of the Financial institution of England has compelled corporations to extend costs to cowl the elevated value of debt? Because it is not wages which might be driving inflation, might this be the reply? https://t.co/IHKdtaegnx pic.twitter.com/ogJL2OacmU

— Richard Murphy (@RichardJMurphy) Could 27, 2023

The FT piece stated:

My hypothesis is a simple one.

First, we all know that inflation occurs as a result of corporations improve costs.

Second, we’re instructed (opposite  to a lot proof) that they don’t seem to be rising income.

So, third, they should be rising costs as a result of their prices are rising. These prices are available in three types:

• Purchased in items and providers.
• Labour.
• Curiosity financing prices.

We all know uncooked materials costs are virtually universally falling. I’ve documented that.

And we all know wages are lagging inflation, being a good distance behind, in order that they can’t be guilty right here.

So, what about curiosity? The Financial institution of England is placing up charges as quick as it may possibly and is decided to depart charges as excessive as potential. Its apparent purpose is to create long run optimistic actual rates of interest for the  first time since pre-2008. Suppose rational companies have observed this and are placing up their prices to cowl these anticipated curiosity value will increase, that are a significant a part of their expenditure? Curiosity prices account for 30% of the revenue of water corporations, for instance, though they’re a bit excessive. Fir enterprise to do that could be solely rational.

However that will imply that we have now an rate of interest / inflation spiral within the UK that’s being pushed by the Financial institution of England and the insurance policies it’s supposedly setting up to deal with inflation, when (as they are saying we should) we take future expectations into consideration.

I’m suggesting that that is not less than believable. Given the Financial institution’s denial of different prospects, or the denial of the potential of inflationary wage / inflation spirals by the IMF, amongst  others, and within the absence of different variables that may now be having rational impression this one appears to me to be among the finest explanations for ongoing inflation now. Enterprise is now rationally anticipating its curiosity prices to stay  excessive into the longer term and is rising costs accordingly.

I believe the Financial institution to disclaim this, however they’ve already admitted their fashions of inflation primarily based on their very own understandings of the difficulty don’t work, so little weight ought to be given to that.

As a substitute it is time to minimize charges and take away the one excuse companies have to extend costs as a result of rates of interest are the one value anticipated to stay excessive, and excessively so, from now into the longer term.