The Lemon Fool

Vodafone sent an update on telecoms package today quoting RPI of 8.2% to be added to bills.

How long do you expect inflation over 5% to last?

Apart from fuel in all its forms, I have not seen much sign of inflation so far, and have been gently stock piling non perishables, including cleaning materials and logs for my woodburner for next winter. I am on a fixed contract for my electricity until September which currently protects me on that front but will most likely get a double whammy come October.

Anyway I have, hopefully pessimistically, said two years I can't see it being much less for the next 18 months but here's hoping. We are talking about over 5% inflation.

Dod

There are signs (inverted curves and suchlike) and suggestions that we might be in for some stagflation later this year, - inflation with negative growth.

To have a stab at answering the OP's question, we must surely be destined for inflation until the October energy increases have taken place and this year's various price increases (still taking place) have dropped out of the equation, so I've opted for 2 years.

Few of the politicians in power today are old enough to have experienced it first hand last time around, which is why they allowed it to get a grip this time. They simply saw no danger, and still don't really.

It took a decade or more to get a grip on last time, and although history rarely repeats itself it usually rhymes, so I voted for 5+ years.

I would not be surprised if it stayed over 5% for a decade or two. It suits the govt to erode national debt and given the size of all debt, national and personal, I can't see them ever ramping up interest rates to the degree necessary to lever inflation back down again any time soon, given all the external pressures and the consequences of raising interest rates on the property market, etc etc.

Last time RPI was this high, base rates were 7%. Think about that!

(According to the BBC the other day.)

Mike4 wrote:Few of the politicians in power today are old enough to have experienced it first hand last time around, which is why they allowed it to get a grip this time. They simply saw no danger, and still don't really.

It took a decade or more to get a grip on last time, and although history rarely repeats itself it usually rhymes, so I voted for 5+ years.

I would not be surprised if it stayed over 5% for a decade or two. It suits the govt to erode national debt and given the size of all debt, national and personal, I can't see them ever ramping up interest rates to the degree necessary to lever inflation back down again any time soon, given all the external pressures and the consequences of raising interest rates on the property market, etc etc.

Last time RPI was this high, base rates were 7%. Think about that!

(According to the BBC the other day.)

You realise that interest rates aren't set by the government don't you?

dealtn wrote:

Mike4 wrote:Few of the politicians in power today are old enough to have experienced it first hand last time around, which is why they allowed it to get a grip this time. They simply saw no danger, and still don't really.

It took a decade or more to get a grip on last time, and although history rarely repeats itself it usually rhymes, so I voted for 5+ years.

I would not be surprised if it stayed over 5% for a decade or two. It suits the govt to erode national debt and given the size of all debt, national and personal, I can't see them ever ramping up interest rates to the degree necessary to lever inflation back down again any time soon, given all the external pressures and the consequences of raising interest rates on the property market, etc etc.

Last time RPI was this high, base rates were 7%. Think about that!

(According to the BBC the other day.)

You realise that interest rates aren't set by the government don't you?

The government decides who sets interest rates.

Mike4 wrote:Few of the politicians in power today are old enough to have experienced it first hand last time around, which is why they allowed it to get a grip this time. They simply saw no danger, and still don't really.

It took a decade or more to get a grip on last time, and although history rarely repeats itself it usually rhymes, so I voted for 5+ years.

I would not be surprised if it stayed over 5% for a decade or two. It suits the govt to erode national debt and given the size of all debt, national and personal, I can't see them ever ramping up interest rates to the degree necessary to lever inflation back down again any time soon, given all the external pressures and the consequences of raising interest rates on the property market, etc etc.

Last time RPI was this high, base rates were 7%. Think about that!

(According to the BBC the other day.)

Okay, I'll bite. "The last time something happened" is a flawed way to deduce what is likely to happen. Economic events move in cycles far more than they do randomly repeating what has just occurred most recently. The economy is not at the same point in the cycle as "the last time RPI was this high". I'll be the counterparty to Mike4's wager by betting that inflation, both CPI and RPI, will be back below 5% within one year. Interest rates don't need to rise a huge amount, they are already up some 200-250bp in some markets and that's enough to have a profound effect on borrowing, demand and the viability of certain businesses IMO. Also the bond market is not expecting a prolonged period of elevated inflation as far as I can tell; I find it more prescient in general than either equity markets or the man on the street.


GS

Mike4 wrote:

dealtn wrote:

Mike4 wrote:Few of the politicians in power today are old enough to have experienced it first hand last time around, which is why they allowed it to get a grip this time. They simply saw no danger, and still don't really.

It took a decade or more to get a grip on last time, and although history rarely repeats itself it usually rhymes, so I voted for 5+ years.

I would not be surprised if it stayed over 5% for a decade or two. It suits the govt to erode national debt and given the size of all debt, national and personal, I can't see them ever ramping up interest rates to the degree necessary to lever inflation back down again any time soon, given all the external pressures and the consequences of raising interest rates on the property market, etc etc.

Last time RPI was this high, base rates were 7%. Think about that!

(According to the BBC the other day.)

You realise that interest rates aren't set by the government don't you?

The government decides who sets interest rates.

Not exactly, and even then they have no control over how any individual votes.

So can you explain the expected series of events you are anticipating such that the government resumes control over monetary policy rate outcomes please?

Mike4 wrote:Last time RPI was this high, base rates were 7%. Think about that!
(According to the BBC the other day.)

1990 or 1991
base rate went up twice in a day, but one of those was never published as it was rescinded by cob
11 to 13 to 15 back to 13

pje16 wrote:

Mike4 wrote:Last time RPI was this high, base rates were 7%. Think about that!
(According to the BBC the other day.)

1990 or 1991
base rate went up twice in a day, but one of those was never published as it was rescinded by cob
11 to 13 to 15 back to 13

Not quite. One of the most interesting days of work in the money markets though (and similarly for my colleagues in FX).

dealtn wrote:

pje16 wrote:

Mike4 wrote:Last time RPI was this high, base rates were 7%. Think about that!
(According to the BBC the other day.)

1990 or 1991
base rate went up twice in a day, but one of those was never published as it was rescinded by cob
11 to 13 to 15 back to 13

Not quite. One of the most interesting days of work in the money markets though (and similarly for my colleagues in FX).

I wasn't sure if I was right
correct me then

Everything is in place for a wage-price spiral IMO.

1. There's been a 25% increase in UK public debt since the start of the pandemic. Assuming economic activity returns to pre-covid levels and this money remains in circulation then it is reasonable to expect it to feed through to inflation.

2. Increasing raw material costs

3. Labour shortages

>5% inflation for years not months would not surprise me.

BoE

pje16 wrote:

dealtn wrote:

pje16 wrote:

Mike4 wrote:Last time RPI was this high, base rates were 7%. Think about that!
(According to the BBC the other day.)

1990 or 1991
base rate went up twice in a day, but one of those was never published as it was rescinded by cob
11 to 13 to 15 back to 13

Not quite. One of the most interesting days of work in the money markets though (and similarly for my colleagues in FX).

I wasn't sure if I was right
correct me then

Well it was 16th September 1992 for a start.

Base Rate started that day at 10%. A hike took place to 12%. Then a further hike was announced (or published) that afternoon to come into effect the following day to 15%.

Base Rates in fact were at 10% again once the decision to come out of the ERM had been taken. Much of the "excitement" occurred in the afternoon when Bank's accounts at the BoE were being squared and settled via overnight transactions - much of the calculations on those balances were manual then too. Overnight interbank trades become limited and difficult and 1 week cash or 1 month paper were the form of liquidity to take to ensure positive balances at the Central Bank were maintained - and much larger balances than were desired by funding rules resulted (itself making it difficult for short banks to cover). The normal end of day process with the BoE had to be "manufactured" to ensure no clearing bank was censured.

A busy evening for City hostelries.

Thank you that make more sense re the dates
I remember it now I had a fixed rate mortgage at 11% and remember think that was a good decision
but not by the time it finished, rates were down below that
Overall it was about break even

GoSeigen wrote:

Mike4 wrote:Few of the politicians in power today are old enough to have experienced it first hand last time around, which is why they allowed it to get a grip this time. They simply saw no danger, and still don't really.

It took a decade or more to get a grip on last time, and although history rarely repeats itself it usually rhymes, so I voted for 5+ years.

I would not be surprised if it stayed over 5% for a decade or two. It suits the govt to erode national debt and given the size of all debt, national and personal, I can't see them ever ramping up interest rates to the degree necessary to lever inflation back down again any time soon, given all the external pressures and the consequences of raising interest rates on the property market, etc etc.

Last time RPI was this high, base rates were 7%. Think about that!

(According to the BBC the other day.)

Okay, I'll bite. "The last time something happened" is a flawed way to deduce what is likely to happen. Economic events move in cycles far more than they do randomly repeating what has just occurred most recently. The economy is not at the same point in the cycle as "the last time RPI was this high". I'll be the counterparty to Mike4's wager by betting that inflation, both CPI and RPI, will be back below 5% within one year. Interest rates don't need to rise a huge amount, they are already up some 200-250bp in some markets and that's enough to have a profound effect on borrowing, demand and the viability of certain businesses IMO. Also the bond market is not expecting a prolonged period of elevated inflation as far as I can tell; I find it more prescient in general than either equity markets or the man on the street.


GS

No

"No" to what exactly

The high inflation. Around 3 years.
The elevated prices as a result of said inflation. Permanent.

Okay, I'll bite. "The last time something happened" is a flawed way to deduce what is likely to happen.

When the only tool you have (can use) is a hammer then every problem...

Literally no idea.

Inflation is notoriously difficult - almost impossible - to model. None of the models used by central bankers, for example, forecast inflation above 4% in 2021, never mind ending the year around 7%.

IMO I do not see anyone in power taking the threat of sustained inflation seriously, which is why I think it won't go away and will continue. Maybe not at 8%+, but above historical "norms", and well above the 2% official target. Everyone wants to kick the can down the road, so I see it ebbing and flowing anywhere between 4-10% over the next decade until people are so sick of it that they finally take it seriously and shape monetary and fiscal policy to get ahead of it and suck up the short term economic pain that is required to get it under control.

Mike4 wrote: It suits the govt to erode national debt and given the size of all debt, national and personal, I can't see them ever ramping up interest rates to the degree necessary to lever inflation back down again any time soon,

Unlike the 1970s there's debt issued on indexed terms. That must surely bite into government finances eventually.

The danger is that price increases snowball. If a mobile phone contract increases in price by 8%, users may look to increase their prices or wages by more than that, which feeds into the next measurement. In the 1970s wahe and price controls were the mechanisms used to attempt to break the cycle, Later it was threats of bankruptcy and unemployment,