Oh Please!

Second, a cut in interest rates is announced less than a week before it is disclosed that inflation is at a 16-year high.

If we're going to do monetarism can we at least get the basics of it right?

The interest rate now influences the inflation rate some 18 months to two years hence.

So when we set interest rates we don't want to be looking at what the inflation rate is now but what we think it will be in the future.

Now, it is true to say that possibly the most accurate method of forecasting is to say that inflation next month will be the same as it is this, in two what it will be in one and so on ad infinitum.

But then if we all did that then where the employment for economists?

What everyone is worried about now is not the current inflation but the deflation we think is a few months away as the credit crunch feeds through into the real economy. And even if that doesn't happen then we're pretty sure that we've a recession along the way, even if we don't all have to start singing "Buddy, Can You Spare a Dime".

Yes, we do want lower interest rates now because we expect inflation to be a lot lower in the future, which is when current interest rates influence inflation.

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