During the 1970s, central banks often set their policy rates below the rate of inflation, hoping that inflation will just go away by itself without them having to take drastic action. The problem is that hope isn’t a strategy and keeping policy rates below the rate of inflation didn’t work. Inflation spiraled higher until central banks put interest rates in positive territory in 1980. The Bank of England currently has its policy rate at 4.25%. However, core inflation is running at 6.2%. That means that real rates in the UK are 200bps below core inflation. From the perspective of headline inflation, things are much ... (full story)