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

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.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Suggested Topics
Ed Miliband received a warm welcome in Chester
election 2015
Life and Style
Apple CEO Tim Cook announces the Apple Watch during an Apple special even
fashionIs the iWatch for you? Well, it depends if you want for the fitness tech, or the style
Astronauts could be kept asleep for days or even weeks
scienceScientists are looking for a way to keep astronauts in a sleeplike state for days or weeks
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

    Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

    £50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

    Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

    £13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

    Ashdown Group: Training Programme Manager - City, London

    £40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

    Day In a Page

    NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

    Who's monitoring the outsourced NHS services?

    A report finds that private firms are not being properly assessed for their quality of care
    Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

    Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

    The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
    How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

    How do Greeks feel about Syriza?

    Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
    From Iraq to Libya and Syria: The wars that come back to haunt us

    The wars that come back to haunt us

    David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
    Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

    Too busy to surf? Head to The Pool

    A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders
    Heston Blumenthal to cook up a spice odyssey for British astronaut manning the International Space Station

    UK's Major Tum to blast off on a spice odyssey

    Nothing but the best for British astronaut as chef Heston Blumenthal cooks up his rations
    John Harrison's 'longitude' clock sets new record - 300 years on

    ‘Longitude’ clock sets new record - 300 years on

    Greenwich horologists celebrate as it keeps to within a second of real time over a 100-day test
    Fears in the US of being outgunned in the vital propaganda wars by Russia, China - and even Isis - have prompted a rethink on overseas broadcasters

    Let the propaganda wars begin - again

    'Accurate, objective, comprehensive': that was Voice of America's creed, but now its masters want it to promote US policy, reports Rupert Cornwell
    Why Japan's incredible long-distance runners will never win the London Marathon

    Japan's incredible long-distance runners

    Every year, Japanese long-distance runners post some of the world's fastest times – yet, come next weekend, not a single elite competitor from the country will be at the London Marathon
    Why does Tom Drury remain the greatest writer you've never heard of?

    Tom Drury: The quiet American

    His debut was considered one of the finest novels of the past 50 years, and he is every bit the equal of his contemporaries, Jonathan Franzen, Dave Eggers and David Foster Wallace
    You should judge a person by how they peel a potato

    You should judge a person by how they peel a potato

    Dave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
    Beige is back: The drab car colours of the 1970s are proving popular again

    Beige to the future

    Flares and flounce are back on catwalks but a revival in ’70s car paintjobs was a stack-heeled step too far – until now
    Bill Granger recipes: Our chef's dishes highlight the delicate essence of fresh cheeses

    Bill Granger cooks with fresh cheeses

    More delicate on the palate, milder, fresh cheeses can also be kinder to the waistline
    Aston Villa vs Liverpool: 'This FA Cup run has been wonderful,' says veteran Shay Given

    Shay Given: 'This FA Cup run has been wonderful'

    The Villa keeper has been overlooked for a long time and has unhappy memories of the national stadium – but he is savouring his chance to play at Wembley
    Timeless drama of Championship race in league of its own - Michael Calvin

    Michael Calvin's Last Word

    Timeless drama of Championship race in league of its own