King warns of too-low inflation

WTF?_2

IveSeenTheLight wrote: »

This is a huge what if.

You don't know that prices will be adjusted to reflect. They could pay the same and the business has to pass on less to the govt. This in effect a quick cash boost to businesses (which the govt are trying to address) and means in effect consumer price inflation.

Who really thinks that consumers will hold back thinking that VAT (not confirmed if it is being passed on) might be reduced further. I think that most are perceiving this as one off with no set time on a review.

The VAT reduction is there too help businesses, not consumers

That's not how it's being sold to the public, is it?

And if the media are to be believed, businesses are being forced to cut prices to the bone to sell consumer goods to a public that no longer has quite as much ready cash to spend, or is unwilling to spend. Risking an ever-decreasing spiral of price cuts.

In that case, it would seem unlikely that they can simply pocket this as an increased margin.

Unless of course all this guff about the spectre of deflation haunting the consumer market is just hype to give the government an excuse to slash interest rates and massively increase already huge levels of borrowing in a desperate throw of the dice to ignite a consumer led economy again.

Trouble is, you can't stimulate spending when the people have no money to spend.

IveSeenTheLight

!!!!!!? wrote: »

That's not how it's being sold to the public, is it?

Trouble is, you can't stimulate spending when the people have no money to spend.

From what I've seen in the media, action has already been taken to help consumers by reducing interest rates by 2% in two months helping out those with debts and it was also hoped that this would be passed onto businesses who could borrow at a lower rate.

The lower rate was not being lent to the businesses, so the gov't have come up with reducing VAT as a fast way of ensuring that they gett a quick cash injection.

Ee do not live in an american retail culture where the Nett price is known and then you add on the VAT.
I envisage the retail price will remain the same and the businesses see the greater benefit.

who benefits more from the VAT reduction?
A customer who would save £2.13 in every £100 pound spent
or
A business who has 10,000 customers in a month spending £100, increasing profit by £21,300

IveSeenTheLight

The added benefit of retail prices remaining the same is that in effect the nett price increases, thus boosting inflation when there are worries that inflation may go negative.

WTF?_2

Lemonade_Pockets wrote: »

My first post and feel like i'm wading into an argument :-)

I agree that i a discount in VAT does not constitute or contribute to deflation. Infact if anything it does the opposite. For those goods that are eligible for the reduction....surely retailers will just lift the net price to soak up this 'benefit' as profit.

If this is the case surely this is inflation if anything?????

I think this is just a convenient (and reversible) way for the government to dump 'x' billion quid into the economy at large.

Income Tax cuts or increases in personal allowances would be difficult to take away once given .. but with VAT they can get away with announcing a limited term cut. A bit like stamp duty.

My point is that it makes a nonsense of the claims that we are about to be overwhelmed by consumer price deflation trashing the retail industry.

The real problem is the people just don't have the money/credit to keep on buying consumer goods like mindless zombies. That's what's holding people back from spending in the high street, not expectations of further price falls.

All those extra billions should help a bit but not nearly enough IMO. The only real solution here that will stop the decline is for the consumer population to pay down debt and increase savings to the level where they feel confidant enough to spend and take on more debt again.

StevieJ

StevieJ wrote: »

Why did inflation rocket in 1980 when Thatcher increased the Vat rate from 8% to 15%?

Some facts

June 12th 1979 Budget Vat increased from 8% to 15%
May 1979 Inflation rate was 10.3%
May 1980 Inflation rate was 21.9%

For those interested the 1979 budget
http://www.margaretthatcher.org/archive/displaydocument.asp?docid=109497

purch

Why did inflation rocket in 1980

Don't forget that it had been 24% in 1975 and was down to 4 1/2 % by 1983

Guy_Montag

Reducing VAT will have an effect on CPI & RPI as highlighted here. Of course you can debate to what extent CPI & RPI reflect inflation/deflation, but this move will have an effect. Unless you know something that the economists at JP Morgan don't (which is also a possibility).

Malcolm Barr, UK economist at JP Morgan, has calculated that such a reduction in VAT would catapult the Consumer Prices Index - the Government's preferred measure of inflation - into negative territory in August 2009 and keep it there for three consecutive months. The deflationary peak would come in September 2009 according to Mr Barr, with the CPI at -0.6pc.

VAT Cut will Guarantee Deflation

Really2

pickles110564 wrote: »

Wrong. What about all those cowboys out there that charge out including VAT but only accept cash payment. Of couse they then go on to declare this to the tax inspector. Do as your name and get real!

:rotfl: :rotfl: :rotfl:

Well their you go. Lets not charge vat as no one pays it.

I don't do insults, but if I did do insults they would probably be be the best insults in the world.
Fool.:rolleyes:

Really2

!!!!!!? wrote: »

Jeez :rolleyes2

Please try reading my replies.

Let me set it out, in a simple 1..2..3.. one last time in the hope that it gets through this time:

1)We have been subject to a media campaign about the spectre of deflation causing consumers to clam their wallets shut on the expectations of lower future prices.

2)The government comes out with a consumer stimulus package which involves .... lowering consumer prices.

3) DOES ... NOT ..... COMPUTE.

Fair enough but at least acknowladge loweing VAT will not show as a deflationary figure.

StevieJ

purch wrote: »

Don't forget that it had been 24% in 1975 and was down to 4 1/2 % by 1983

It was 24% in 1975 yes but 7.4% in 1978 (post IMF), the only point I was trying to make was that increasing/decreasing Vat effects the official inflation rate. The fact it was down in 1983 is irrelevant as the Vat increase was a one off step change in 1979.