Hyperinflation and Savings rates ?

metrobus

If we went into hyperinflation or towards it would the savings rates and BoE rate follow accordingly ?

I know hyperinflation is defined as 100% over 3 years,but lets say inflation at 20% per year.

Masomnia

Inflation hasn't been far off 20% per year in the recent past and as far as I'm aware interest rates went up accordingly.

nrsql

metrobus wrote: »

If we went into hyperinflation or towards it would the savings rates and BoE rate follow accordingly ?

I know hyperinflation is defined as 100% over 3 years,but lets say inflation at 20% per year.

That's probably the lowest definition of hyperinflation.
The important thing is that it's self sustaining and I think that sort of rate would be just about controllable.
I think of more around 20% per month as the lower end but I've heard it defined as 50% per month. Probably when you hit near 100% per year the slide is inevitable.

No - interest rates wouldn't help your savings - even a slight lag would erode them to negligible values in a short time. Queue up to withdraw while you can buy a loaf of bread with it - if you can still find someone to sell you one.

Lets hope it doesn't happen - but with the plan to cope with debt at the moment ....

JP45

nrsql wrote: »

That's probably the lowest definition of hyperinflation.
The important thing is that it's self sustaining and I think that sort of rate would be just about controllable.
I think of more around 20% per month as the lower end but I've heard it defined as 50% per month. Probably when you hit near 100% per year the slide is inevitable.

No - interest rates wouldn't help your savings - even a slight lag would erode them to negligible values in a short time. Queue up to withdraw while you can buy a loaf of bread with it - if you can still find someone to sell you one.

Lets hope it doesn't happen - but with the plan to cope with debt at the moment ....

Maybe I'm being unduly optimistic, but I really can't see us ending up with hyperinflation in the Weimar / Zimbabwean sense. There is clearly a growing risk of inflation taking off as a result of the so-called extraordinary measures that the Bank of England is about to undertake, but rather than hyperinflation, I think it far more likely that we would see a brief return to the sort of double digit inflation we had back in the 1970s.

Despite its recent shortcomings, I still have sufficient faith in the Bank of England to believe that it would take the necessary steps to reign back the money supply once inflation takes off. But a period of two to three years of low double digit inflation seems to me a distinct possibility.

Masomnia

JP45 wrote: »

Maybe I'm being unduly optimistic, but I really can't see us ending up with hyperinflation in the Weimar / Zimbabwean sense. There is clearly a growing risk of inflation taking off as a result of the so-called extraordinary measures that the Bank of England is about to undertake, but rather than hyperinflation, I think it far more likely that we would see a brief return to the sort of double digit inflation we had back in the 1970s.

Despite its recent shortcomings, I still have sufficient faith in the Bank of England to believe that it would take the necessary steps to reign back the money supply once inflation takes off. But a period of two to three years of low double digit inflation seems to me a distinct possibility.

I'd say that was a sensible comment, not unduly optimistic at all.

Not sure exactly about the Zimbabwe case, but the Weimar Republic had prices doubling every 48 hours at one point, and there is absolutely no reason to believe we'd have anything like that as far as I can see.

metrobus

Hyperinflation definition

http://en.wikipedia.org/wiki/Hyperinflation

So if we had 2 years of 18% inflation would interests rates also
be up in that area ?

jon3001

If you want a basis for comparison in the west, Iceland has CPI inflation as 17% pa. Food inflation was reported to be 30% pa.

Interest rates are at 18% there.

nrsql

Hope you're right but I suspect that in an attempt to stimulate the economy more money would be printed. Once confidence in the currency is lost (and I fear we are heading that way) then there may not be a lot that can be done to stop it. Of course the government may say they aren't printing but I doubt if it would be true.

In the seventies I think we were a lot better off than now.
Double digit inflation would have been good if it had happened a few years ago but then low inflation was marketed as a good thing for some reason.

Masomnia

The BOE have been quite open about the fact that they may need to 'print money', and with interest rates being low there is plenty of scope to raise them in future if quatitative easing did cause some extra inflation.

I don't see why prices rising significantly faster than wages is a good thing

nrsql

The question is whether raising interest rates will stop inflation.

Given what's happened to sterling recently ad our dependence on imports we don't have much choice about prices rising - "quantitve easement" will make that a lot worse. Will then be a shortage of goods due to the risk involved which will make it worse....

JP45

nrsql wrote: »

The question is whether raising interest rates will stop inflation.

Given what's happened to sterling recently ad our dependence on imports we don't have much choice about prices rising - "quantitve easement" will make that a lot worse. Will then be a shortage of goods due to the risk involved which will make it worse....

As far as I'm aware, raising interest rates has in the past proven effective at curbing inflation, at least in the UK.

The fear that many people seem to have, and its one that I share, is that sterling will take a further battering as confidence in the UK economy deteriorates. But its worth bearing in mind that a fall of say 25% in the value of the pound, as has happened recently against a basket of currencies, will not necessarily translate into an equivalent rise in the cost of goods in the shops. Suppliers / retailers have to take account of consumer demand in setting prices, which is surely why the cost of many imported goods such as cars and consumer electronics has not, as far as I can see, risen by anything approaching 25%.

It’s also worth bearing in mind that we are not alone in facing harsh times. Other currencies might well come under pressure. It’s only the US dollar that has a degree of immunity due to its reserve currency status, but even that isn’t set in stone.