Julian Knight: Strewth! The Barmy Army's wonga needs a boost well before 2014

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The Independent Online

Just back from Australia, after watching our boys trounce the home team in the Ashes, an immensely happy event, particularly as I was there four years ago when the Aussies humiliated us five-zip.

Things were very different this time, off the pitch as well. Four years ago Australia was a cheap country. I was able to eat where I wanted, stay in nice hotels, do as many activities as I liked and even afford the only decent lager in the country – Crown, by the way. But this time around I felt like a visitor from a third-world country. My money went absolutely nowhere, the pound having depreciated some 40 per cent against the Australian dollar. A pub lunch was really splashing the cash (I have never eaten so much McDonald's) and as for my favourite Crown beers, I cut back, just a bit – the rest of the Barmy Army weren't prepared to make such a sacrifice, though.

It's only when you go abroad that you realise just how much poorer we are than before the credit crunch. Years of a strong pound, based on the attractiveness and profitability of the City, are over, possibly forever. But we do need to try to arrest the decline of the pound a bit, and the only way to do this is higher interest rates.

I'm sure my inability to afford a Crown is not a deciding factor for the Monetary Policy Committee, but it ought to be, as it underlines a fundamental truth about currency depreciation – that while it makes your exports cheaper, it makes your imports more expensive. And this, combined with massive demand for commodities from the "emerged" Chinese economy – I'm going to stop calling it "emerging", as it is set to overtake America's in a decade or so – has led to the biggest risk of inflation shooting out of control in the UK since the early 1970s.

People have such alarmingly short memories when it comes to inflation. After the oil crisis of the early Seventies it took more than two decades and some three million unemployed to get prices back under control. While many respected commentators were still warning of the dangers of deflation – falling prices – and of the UK following Japan into a "lost decade", I had an eye on the gradual uptick in prices. This is now turning into a full-tilt inflationary spiral.

Inflation does have the effect of reducing the real value of the Government's debt, but it lays waste to everything else – your savings, earnings (which so often lag behind prices), the value of your assets and the currency.

Those inflation deniers now shrug their shoulders and say there is little we can do about rising prices as it has nothing to do with domestic matters. Instead, it's all due to imported commodities – food, oil, gas etc. But whether inflation is being imported or not doesn't really matter to millions of Britons struggling with supermarket and home-energy prices. So what can be done?

Our one weapon is an interest-rate rise. Generally, such hikes are a slow and crude method of dampening domestic demand – something we don't want – but they do have another effect of bolstering the value of the currency. With the eurozone having serious difficulties and the continued economic problems in the US, there is an opportunity for the pound to come through the middle.

Markets move on sentiment and a rate rise at the next MPC meeting could mark the pound as a buy rather than a sell as it has been since 2007. And this isn't because we are strong but more that the pound has been oversold and the euro, in particular, overbought. But what could this mean for prices? Well, a stronger currency – even 5 or 10 per cent – will mean imports are cheaper, and that's our food and energy, dampening inflation. Even a quarter of a per cent rise in interest rates now could be enough to cause this change in market sentiment. What's more, higher rates should increase returns for savers, who for too long have been paying the unfair price of bolstering the consumer.

The truth is that if we don't act now on inflation it could well become endemic. Rolling the interest-rate dice is the only course of action.

What a Balls up

Ed Balls will be one politician banking on the shortness of people's memories. Gordon Brown's right-hand man and architect of the deficit is in the job he really wanted. Fortunately, he is only a shadow Chancellor rather than the Chancellor. Why fortunate? He may be a highly intelligent man, but Balls's thinking on the deficit would shame an economics sixth former.

He actually believes that Labour's plans for the deficit – poorly timed and unsupported by concrete ways to save money – go too far. I can only presume he thinks it's a good idea for the country to continue to borrow £170bn a year for the next decade, turning us into a poor-man's Italy or Portugal. Where does he think the money will come from to pay all that interest? The more the Government borrows the more it has to pay back and the less it can spend – and then the next year the more it has to borrow ....

What's more, the interest rate you have to pay goes up as you become a worse bet, and this feeds into the real economy. Mortgages go up, you have recession and the tax take falls. It's the economic dead end to end all dead ends – and that's the way of Ed Balls.

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