Is Inflation Really Under Control? The Psychology of Rising Prices | IEA Podcast

Описание: The Bank of England has held interest rates at 3.75%, but Lord Frost and Kristian Niemietz warn that the “psychology of inflation” remains unbroken in the UK economy. With wages rising by government fiat and consumers still expecting persistent price increases, they argue that rushing back to near-zero rates would be a mistake. The Bank has simultaneously downgraded GDP growth forecasts to just 0.9% for this year, down from 1.4% last year, revealing an economy trapped in stagnation. Frost argues that a decade of near-zero interest rates has fundamentally distorted Britain’s economic structure, keeping unprofitable companies alive and preventing investment from flowing to its most productive uses.

On Brexit, the conversation turns to Labour’s proposed “reset” with the EU and whether Britain has genuinely diverged enough to make realignment difficult. Frost reveals that the final thing he did in Number 10 on Brexit night was argue about game bird regulations, symbolising how deeply EU rules constrained British sovereignty even in the smallest areas. Both guests contend that Britain has done just enough post-Brexit reform to compensate for the estimated 1% cost of leaving the single market, which is why growth patterns haven’t dramatically changed. However, the failure to diverge more substantially leaves the door open for future governments to drift back towards EU alignment.

The discussion highlights a fundamental tension in British economic policy. Without meaningful regulatory divergence, the single market remains an attractive option for those prioritising frictionless trade over sovereignty. Yet as Frost warns, rejoining would mean accepting rules with no influence over their creation, from pesticide regulations to gene editing restrictions. With inflation expectations still elevated and growth forecasts dire, Britain faces a choice between the painful structural reforms needed for genuine recovery or the comfortable drift back towards European regulatory convergence.

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