The easy way out

Interest rates went up yet again yesterday - this time to 6%. They were raised to deal with a threat of inflation which does not look real. And they could, by boosting the pound, make the state of some struggling industries even more desperate, while feeding the growing complaint in the regions that their interests are being sabotaged in the cause of damping down the economy of the south-east.

The Bank of England, whose monetary policy committee (MPC) now sets the rate, is concerned that a fast recovering economy, with spending fuelled by house price inflation in parts of the country, might reignite inflation. If the future were going to be a carbon copy of the past that might be true. But it is not. Three things have changed. First, there has been a return to Old Economy conditions before the oil price explosions of the 1970s ushered in an (exceptional) 25 years of inflation. Second, globalisation has given consumers and producers increased access to cheaper sources of supply. Third, and most important, the impact of the internet. For the consumer, being able to buy online not only cuts out intermediaries but enables users to trawl globally for cheaper sources of supply.

It is true, as the bank would argue, that e-commerce is a small proportion of activity, but that is not the point. Producers know that web commerce will explode and that alters their present perception of future price increases. Even more important than business to consumer trade is company to company trade. This will account for up to 80% of the impact of the internet on business. The huge cost savings generated will help firms maintain profits during a period of digital deflation when it will be difficult to raise prices. And in any case: where is the evidence of inflation? The latest figures showed a fall in wage settlements and the government's official index puts price inflation at a modest 2.2%. If the recent oil price rise is excluded, inflation would be down to only 1.5% - a level so low it would require the MPC to explain to the chancellor why they weren't nearer the official target of 2.5%. The bank is worried that the volume of retail sales has risen by 3.5% over the past year. But the value has only risen by 3.3%. Why? Because shops cannot make price rises stick.

Meanwhile the pound has soared to dizzy heights that make exporting so difficult that companies have started to source components abroad in a major way. The single biggest complaint of the farming industry is the strength of the pound, yet the government acts as though there is nothing it can do. It is wrong to suppose that interest rates have to be raised, causing serious problems for manufacturing and the regions, just because house prices soar in the south. The government could increase stamp duty or legislate to lay down minimum mortgage deposits. If interest rates were brought down to nearer European levels then the pound might fall - switching the engine of growth from imports to exports. The US realised early on that globalisation and the internet could enable economies to grow faster without running into inflationary problems. As a result the US economy has expanded 4% on average for four years without hitting the inflation buffers. There are encouraging signs of strong technological change in the UK - but we will never know whether this could have enabled the economy to grow faster without inflation because of the Pavlovian reaction of the authorities. Growth shows signs of pushing up towards 3% and what do they do? They throw in the towel.