Latest Inflation figures released.

[stevensfo]

Figures for February released today.

RPI now 3.2%

Any thoughts on pressure to increase interest rates?

https://www.ons.gov.uk/economy/inflatio ... timeseries


Steve

[Raptor]

I read in an ADFVN newsletter that a high rate may put more of the BOE people in line to rate rises than the 1 we got this time. Unfortunately I deleted the newsletter so cannot attribute this to which broker said this. However, if this trend continued I would expect more emphasis on a rate rise than we have now.

Raptor.

[PeterGray]

Presumably most of that comes down to exchange rate shifts? They may go further, but will only go so far, and I'd think that there would be little enthusiasm to raise rates in response to exchange rate influences alone. If there were signs that wage inflation was following then perhaps.

[odysseus2000]

There are several stages to the use of interest rates by central banks.

Towards the end of the business cycle rates are used to counter inflation, but we are currently no where near the end of a business cycle, much nearer the beginning and in this part of the cycle, interest rates are used to create inflation. By raising coupons at this stage in the cycle, the amount of money going into the economy increases and this extra spending power will push up prices as central banks wants. The current enemy remains deflation, not inflation.


Regards,

[flint]

If inflation continues to rise, the government will be under great pressure to allow earnings to rise.
Whilst the government may be sanguine about this in the private sector, any significant rise in earnings in the public sector would not be welcome.

I am curious as to why Odysseus 2000 thinks that deflation is the enemy. Until the Brexit inspired fall in sterling, that may have been true, however, unless one believes that the resulting inflationary effects are complete, there are more to come. Whilst I am no economist I think the effects are still at an early stage and expect inflation to increase further. Consequently the risk of deflation is not great, unless sterling significantly recovers.

[Alaric]

. The current enemy remains deflation, not inflation.

If technical advances and increased productivity makes goods and services cheaper, why is that bad?

[odysseus2000]

Flint

I am curious as to why Odysseus 2000 thinks that deflation is the enemy. Until the Brexit inspired fall in sterling, that may have been true, however, unless one believes that the resulting inflationary effects are complete, there are more to come. Whilst I am no economist I think the effects are still at an early stage and expect inflation to increase further. Consequently the risk of deflation is not great, unless sterling significantly recovers.

Deflation is too little money chasing too many goods. Sure weaker £ makes imports more expensive, but there is still no, as far as I can tell, capacity constraints for manufactured goods. There is, as usual in the UK, potential property inflation, but if the politicians do carry through with their commitment to build 250,000 homes per year there is more supply there too.

Meanwhile we look, imho, to be just beginning to emerge from the emergency measures of QE, -ve interest rates etc and the central banks want to get things back to more historical norms and away from the danger of deflation, which suggests to me that they will continue to raise rates until we have some inflation, not as a counter to it. The act of raising bond coupons puts more money into the economy and should weaken sterling and increase inflation. At some distant point they will worry about inflation and raise rates to fight it, but they will consider that to be a quality problem.

Regards,

[odysseus2000]

Alaric

If technical advances and increased productivity makes goods and services cheaper, why is that bad?

In many practical senses it is good, but its not so good if you are a capitalist and want to make money nor if you want economic growth which is the desire of central banks.

As in most things it all becomes an issue of balance.

Too much technical advance, too much productivity and margins get squeezed and capital doesn't want to invest with those kinds of low returns and the politicians get worried that capital will leg it and go somewhere else and stop making donations to their party.

Too little technical advance, too little production and margins rocket and inflation appears and consumers don't like it and vote for different politicians.

These kinds of forces are constantly at work in markets and government policy which are all generally skewed towards the rich as they are ones who write the laws and influence the politicians.

Regards,

[Urbandreamer]

If technical advances and increased productivity makes goods and services cheaper, why is that bad?

As long as profits can continue to be made it isn't. However it is difficult to see how productivity can reduce the cost of many services.

The problem that can occur with deflation is that profits and consumer spending dry up. After all if you can buy the same thing cheaper why wouldn't you. So if you believe that a product will be cheaper in 6 months time you may delay purchase. That becomes 6 months without income for those who you purchase from. In turn that can cause them to lay off employees, who then have less income to spend. Which means that other busnesses suffer etc.

Reputedly this is what happened in the American great depression.

http://www.sjsu.edu/faculty/watkins/dep1929.htm

[Alaric]

After all if you can buy the same thing cheaper why wouldn't you.

Such is the nature of today's society that in the obvious example of consumer electronic gadgetry, it just doesn't happen. Indeed the brand new can be sold at a premium price. For that matter if you need the service or item today, waiting six months isn't an option.

[flint]

Alaric

Technical advance is not bad, and has done wonders for the US economy.
Silicon Valley has driven economic growth, whilst the rustbelt declined.
Investors supported technical advance and walked away from steel producers.

[odysseus2000]

Alaric

Such is the nature of today's society that in the obvious example of consumer electronic gadgetry, it just doesn't happen. Indeed the brand new can be sold at a premium price. For that matter if you need the service or item today, waiting six months isn't an option.

If you listen to conference calls you will repeatedly hear how the imminent arrival of a new model takes sales from existing models. One sees this all across manufacturing industry from Apple through to Autos.

Waiting, not upgrading are both functions of what is to come and money in pockets. If there is something flagged as exciting to come then folk will postpone purchases. If folk are concerned about their jobs or are having to pay more for overheads of fuel, food, accommodation etc then they will also put off buying.

Regards,

[Urbandreamer]

Just a quick word about inflation and technical advances.

Deciding how to measure inflation is not an easy thing. Specifically though, if computers and smart phones get more powerful do you regard them as costing the same or becoming cheaper in processing power. It's my understanding that the second view is often used.

The CPI adjusts prices to account for changes in the quality of consumer electronics and other items. These adjustments reflect innovation and technological changes in the items.

https://www.bls.gov/opub/ted/2015/long- ... -items.htm

Of course x286 computers running Windows 3.1 are not readily available and Microsoft will no longer sell you that OS so quite how valid that part of the measure is must be up for debate.

My point to Alaric was poorly written. If all deflation was caused by such smoke and mirrors, yet everyone is still willing and able to play then such deflation is likely not a problem. Deflation in the whole though often is the measure of a problem, hence in simple terms deflation may be considered a problem.

[odysseus2000]

UrBandreamer


Deciding how to measure inflation is not an easy thing.

CPI is measured by folk, often retired teachers, who buy a basket of goods & send in the cost of the goods.

The basket is meant to measure what folk typically buy, but is necessarily subjective and CPI will often miss important cost changes, some times addressed going forwards with removing & adding new basket items.

CPI is far from some well defined standard candle.

Regards,

[stevensfo]

I am by no means an expert on these things but I do remember many years ago, some french colleagues laughing at yet another attempt by their government to keep the official inflation figures low, by adding fly-paper to the list of goods, something which, they informed me, tended to be cheaper every year.

I also vaguely remember the CPI being introduced as a way of comparing countries in the EU, but RPI would be used ‘within’ the UK. To this day, the RPI is used by NS&I for their index linked certificates, increases in train fares and paying back student loans. The RPI also includes Council Tax, Mortgage payments and house insurance in the calculations, which the CPI does not.

So I still use the RPI inflation rate for gauging my portfolio and have no plans to change. What clinched it for me was discovering that the CPI calculations include ‘hedonic regression analysis’, something I’m sure you guys will understand far better than me, but seems to mean that an allowance is made for people spending less each year on the same thing. While important to our expenditure, I can’t help thinking that it’s just another fiddle factor that’s open to abuse.

Steve

[dealtn]

Flint

I am curious as to why Odysseus 2000 thinks that deflation is the enemy. Until the Brexit inspired fall in sterling, that may have been true, however, unless one believes that the resulting inflationary effects are complete, there are more to come. Whilst I am no economist I think the effects are still at an early stage and expect inflation to increase further. Consequently the risk of deflation is not great, unless sterling significantly recovers.

The act of raising bond coupons puts more money into the economy and should weaken sterling and increase inflation. At some distant point they will worry about inflation and raise rates to fight it, but they will consider that to be a quality problem.

Regards,

Given your wish for more posters and discussions maybe you could expand on this belief of yours. Leaving aside the fact that bond coupons aren't under the direct control of the mpc (or BoE or government), what transmission mechanism do you believe in that results in more money being injected into an economy by rising the price of money, ie. its rate of interest?

[odysseus2000]

dealtn
Given your wish for more posters and discussions maybe you could expand on this belief of yours. Leaving aside the fact that bond coupons aren't under the direct control of the mpc (or BoE or government), what transmission mechanism do you believe in that results in more money being injected into an economy by rising the price of money, ie. its rate of interest?

Central banks set interest rates.

There are lots of holders of govvie paper and corporate bonds.

As interest rates go up, all the holders of bonds get larger payments and this on balance gets spent in the economy.

Regards,

[Alaric]

As interest rates go up, all the holders of bonds get larger payments and this on balance gets spent in the economy.

You only get any more on new lending. It's not called "fixed" interest for nothing.

[odysseus2000]

Alaric

You only get any more on new lending. It's not called "fixed" interest for nothing.

As rates rise bonds become more attractive for income seekers who buy and this leads to more money going out.

Look at e.g. the US treasury payments as rates rise and you will find it goes up.

Regards,

[Alaric]

As rates rise bonds become more attractive for income seekers who buy and this leads to more money going out.

Fresh lending only though. A Government or a Company that has borrowed in the past but has no need to borrow in the future doesn't suffer any change in cash flow as a result of interest rate rises or falls. It's only when it has borrowed in the form of an overdraft or similar that it will be paying out more.