Ivan, Gooseman,
I concur with your views and essentially they are more or less the same. That is inflation has taken over as higher priority than maintaining economic growth. Excess liquidity and demand needs to be removed from the market. Only two choices:
1. Control demand with taxes... (better choice imo)
2. Control supply side with interest rate rises...
As politicians are pretty useless with respect to doing right thing - ie don't get elected if you raise taxes,
Only other alternative is to raise interest rates. However, given the pain many average citizens are feeling with the prospect of rising prices and good few losing homes plus many more struggling with home payments - not to mention the Banks and sub-prime losses...
It might just be better to do nothing and take the cautious route. This is what I would do. If taxes fail to rise and inflation continuous along with commodity and energy prices then yes interest rates will rise.
One last comment - INFLATION can be good for the economy. Look at the pros:
1. Debt reduced (ie cost of money, interest rates approaching zero and hopefuly negative value. r=5%, i=4% --> real rates= 1%)
2. House prices will sooner or later go up in line with inflation (ie house price adjustment will be quicker)
3. Producers able to pass on rising costs
4. Wage pressures maintained given doom and gloom and lay offs.
One other factor in these days is to prevent a strong pound so we can compete in the export markets. Raising rates to stifle inflation is likely to damage BoP prospects and probably further contribute to domestic inflation.
It's all very messy with little chance of any way out with out a great deal of pain...
