Ever since last autumn, the vast majority of us have noticed that our expenses are increasing. We noticed it perhaps only when electricity prices rose sharply after the summer of last year, but many other goods have also become more expensive during the year. Everything from petrol to food has risen in price. Among other things, news has documented the largest price jump on food in over 40 years. In May, consumer price inflation was 5.7 per cent. This is the strongest price increase that has been measured since December 1988. Large parts of the price increase are due to higher prices for electricity and fuel, but furniture and food also drive up the price increase. One of the most interesting things about the figure of 5.7 per cent is still what it would have been if the government had not given Norwegian households electricity support. Without the electricity subsidy, inflation would have been two percentage points higher, at 7.7 per cent, according to Statistics Norway. Political dilemma The power support is a good illustration of the dilemma politicians around the world are now facing. On the one hand, they want to help people face the tougher economic times. In Norway, they have chosen to help where most people are in pain right now, namely the electricity bill. In Germany, according to DNB, the maximum price of public transport has been introduced and petrol taxes have been cut. In California, there are plans to distribute money to people, to help them with the increased expenses. This type of support scheme is understandable from both a political and a social perspective. In Norway, absolutely all households receive electricity support, regardless of income or need. It makes sense to avoid that the most vulnerable groups in particular do not end up falling too far behind with bill payments. Minister of Finance Trygve Slagsvold Vedum is concerned about high interest rates. Photo: Håkon Mosvold Larsen / NTB Unfortunate side effect On the other hand, broad support schemes have another effect, namely that we keep part of our purchasing power that should have gone to pay the electricity bill. In this way, the authorities contribute to us not being able to confiscate purchasing power, in an economy where prices are rising sharply. In theory, this will help keep inflation up, instead of curbing it. As macroeconomist Magne Østnor in DNB Markets sums up: “The fact that we are increasingly seeing more examples of fiscal policy measures to shield households from high prices means that we must also expect demand to hold up better than if households took the whole bill themselves. It is also a factor that the central banks must take into account ». Magne Østnor in DNB Markets. Photo: Johan B. Sættem Throwing money at the problem can thus lead us deeper into disability. It is also one of the reasons why the government has been reluctant to introduce other support schemes as well. They are afraid that it will only contribute to even higher price growth. Using the interest rate weapon The most effective tool we have against excessive inflation is for the central bank to raise interest rates. Then fewer people can afford, for example, mortgages or car loans, and you spend less money on goods and services, because you have to spend more on interest. In this way, one tries to control demand in the economy, and thus stagnate prices. If the central bank does not intervene, prices will continue to run even more erratically. When prices rise a lot, we can afford fewer and fewer things for the same pay slip, so that our purchasing power falls. So even though the central bank also helps to give you worse advice now, it has to do something that hurts a little now – for it to get better in a few years. Low interest rates give high risk In a column on news.no, central bank governor Ida Wolden Bache points to precisely this: “If we had not increased the interest rate, or increased it less, it would have improved households’ finances in the short term, in the economy becomes so high that inflation rises. This could lead to us having to raise interest rates even higher later, with the risk of triggering a downturn in the economy and rising unemployment. Governor Ida Wolden Bache Photo: STAFF / Reuters Last week, Wolden Bache raised the key interest rate here at home by 0.5 percentage points, which can be called proper shock therapy. At the same time, she announced that there would be an interest rate increase just over the summer – and then six more until next summer. More demanding in the future It will make it more demanding for households in the future – and that is exactly the point. Norges Bank wants us to spend less money. They want us to have less to deal with. It’s the way to get prices and the pressure on the economy down. Then the government’s fiscal policy, ie public spending and support schemes, must also go hand in hand with the monetary policy pursued at Norges Bank. This makes the economic times we now have extra demanding, because it does not help to throw money at the problem. On the contrary. The question is whether the politicians manage to resist the temptation.
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