Governments do not, in fact, control prices
One of those little sadnesses for planners everywhere. Of course governments can try to control prices and they often do so. But they never do in fact succeed. For those old certainties of supply and demand come into play and change the price away from that mandated.
Sure, sure, fix rent nice and low and marvel as people sublet - at the actual market rent - those low cost units they’ve been allocated by the political process. Make chicken nice and cheap as that nice Mr. Chavez did and watch in wonder as there is none available at that mandated price but plenty at the real price on the black market. This is just what happens:
In competitive auctions to lend the Government money, these major institutional investors, even as the MPC has been cutting, have been demanding higher rates when lending to compensate for the elevated inflation they still think is coming.
Since last August, as the policy rate has shifted down 1.25 percentage points, the UK’s 30-year gilt yield has been pushed sharply up – from less than 4.5pc a year ago to 5.3pc on the morning of Thursday Aug 7, prior to the MPC’s midday announcement, a rise of more than 0.8 percentage points in the opposite direction.
By last weekend, that market-driven borrowing cost had gone up to 5.43pc, flying in the face of the Bank of England.
The Bank of England can set the interest rate that it is willing to pay upon reserves, of course it can. This will influence longer term interest rates, certainly. But that influence is not necessarily even in the direction desired let alone by the amount.
Because prices - real prices, not headline - are set by supply and demand, not by fiat. That’s just the way that it is.
Both economic policy and basic politics would work so much better if people would just grasp this really, really, basic point. You can declare whatever you like about prices but they’re not going to do what you tell them. Supply and demand rule here - the only way to change prices is to change either supply or demand or both.
Tim Worstall