The Bank of England must cut rates now

Prices are rising and, worse still, the Government is demanding that we accept pay rises below the rate of inflation. Now the Bank of England is threatening to raise interest rates to control prices. That means less pay and possibly higher interest rates just when the cost of living seems to be rising exponentially.

We face this worrying scenario because, according to classical economics, you constrain price rises and control inflation by limiting demand. One way is by raising interest rates which makes credit (such as loans and mortgages) more expensive, meaning consumers have less money to spend. Governments also try to ensure that wages don't chase prices such that we demand more cash to pay for the rising cost of living. This would pump more money into the economy and stimulate demand, creating

what economists call a 'wage price spiral'. Thus, our leaders tell us that we must curtail our pay claims in order to bring price rises down to an acceptable level.

But this is a recycled right-wing economic theory that no longer applies to the current economic situation. Very little of the rise in prices is caused domestically, so suppressing UK demand will have minimal impact on inflation. On the contrary - and in this the Chancellor and the Governor of the Bank of England are right - current inflation is mostly caused by vast international prices rises: the huge increase in the price of oil (up 80 per cent in a year), wholesale gas (an astonishing 160 per cent) and world agricultural prices food etc (60 per cent). Other commodities such as metals have risen markedly and, with sterling depreciating by 12 per cent over the last year, all these imports have become even more expensive.

This feeds through to British inflation, which according to New Labour's preferred CPI measure, is now running at 3.3 per cent - whereas RPI, which includes housing costs,