Think inflation worries are over?

Really2

Wookster wrote: »

1) What's your point? That we're in a good situation because your monthly outgoings are decreasing?





2) Actually the CPI is still at 3%, some 1% over the target range.



3) So the impact of this is simply discounted because Really2 thinks no one is buying imported goods such as electricals? :rolleyes:

1) That is deflation

2) was it not over 5% and is predicted to go negative this year. RPI will be negative this month (now home energy and mortgages are set to fall.

3) Will you grow up I am just stating overall inflation is down and all figures point to that.(and that we are in recession and big ticket items are not selling so well is that a surprise to you?)
OK food inflation is still up (but still lower than 6 months ago) Go and invest in frozen peas if you think that is what the markets are saying.

Sir_Humphrey

I never argued that goods with inelastic demand such as food would not increase in price with a falling £. I argued that goods with high demand elasticity would not go up. It is called demand destruction - the reduction in demand counteracts the falling pound owing to squeezed margins. Any business on tight margins goes to the wall. It is not very nice, but that's Capitalism, which businessmen tend to like until it bites them on the backside.

Wookster

Really2 wrote: »

1) That is deflation

Its a correction of way over egged prices. I have yet to hear conclusively why this is a bad thing (other than because of this foolish notion that you're rich because your house has increased in value and you can withdraw your equity & get a new car & go on holiday etc etc.)

Really2 wrote: »

2) was it not over 5% and is predicted to go negative this year. RPI will be negative this month (now home energy and mortgages are set to fall.

Hmmmm well the economy is also forecast to grow in the second half of the year. So much for forecasts eh?

Really2 wrote: »

3) Will you grow up

It is just impossible for you to have a sensible conversation without resorting to some insults.

Sir_Humphrey

A further point. People familar with my posting on GHPC may recall I was able to attend a seminar with Andrew Sentance of the MPC last year (Sentance is known as an hawk - voting for higher IRs, although he dislikes the label).

The personal inflation rate issue is a valid point IMO. When I asked Sentance his reply came in two parts:

a) Perception of variations in personal inflation rates were exaggerated - i.e there was not that much variation.

b) There was nothing the MPC could do about it anyway.

And before the tin-foil-hat inflationists start up, this is a guy who voted for higher IRs in 2006 and 2007 - he is the second most hawkish member of the MPC after Tim Besley.

itsnever2lateisit?

Inflation impacts different people in different ways. For those who have a (largish) excess of income over expenditure inflation for them is relatively low. But for those who find themselves with too much month left at the end of the money it is different. Food inflation means that a greter proportion of your income is taken by it, a lack of spare funds means you are unable to buy those goods where prices are falling.

Yes road fuel is cheaper than a year ago, but still much higher than 2 years ago in the case of diesel, and that is money that HAS to be found if you want to get to work.

Like LIR I live in the stix, and oil has gone from 12p in 2001 to 70p last year, thankfully it has fallen back now but still around 40p.

I agree things are easier this year than last, but the effect of inflation is cumulative, on a personal POV I need food and fuel deflation for months to come, I care not if flat screen tv's and cars double in price to compensate:D

Really2

Wookster wrote: »

It is just impossible for you to have a sensible conversation without resorting to some insults.

Wookster wrote: »

So the impact of this is simply discounted because Really thinks no one is buying imported goods such as electricals? :rolleyes:

You are funny wookster I never insulted you I just stated you were acting like a child.

you see inflation in one area but fail to see deflation in other areas even though all statistics are saying deflation.

You then even stick to it when I prove my own personal expenses show deflation.

I don't want to get in a slanging match you, I think your argument as been proved to be sufficiently wrong overall inflation is not a threat at the moment.

StevieJ

Sir_Humphrey wrote: »

I never argued that goods with inelastic demand such as food would not increase in price with a falling £. I argued that goods with high demand elasticity would not go up. It is called demand destruction - the reduction in demand counteracts the falling pound owing to squeezed margins. Any business on tight margins goes to the wall. It is not very nice, but that's Capitalism, which businessmen tend to like until it bites them on the backside.

We do have substitution e.g. the Tesco own brand replacing the branded goods as the consumers choice, so food demand is not totally inelastic.

Sir_Humphrey

StevieJ wrote: »

We do have substitution e.g. the Tesco own brand replacing the branded goods as the consumers choice, so food demand is not totally inelastic.

Yeah, absolutely. Cheap champers all round.

tomterm8

econo wrote: »

Can you please give us an insight on how the single biggest wrecking ball known to modern man and probably the single most misunderstood, will help at the levels you quote?

It's not the biggest wrecking ball known to modern man. Deflation (as in, in its formal definition as a generalised reduction in the quantity of money or the velocity of money) IS the greatest wrecking ball in the history of mankind.

If you go back to the very foundation of modern economic thought - Irving Fischer's theory of debt deflation - you can easily find out why I can make that statement.

To put it simply, what the mass of people are trying to do at the moment is reduce their debt. If in good times one person sells their goods, or reduces spending, they can easily reduce their debt. In a depression scenario, which we are in, the aggregate interest on debt becomes so large as a proportion of income that it reduces the ability of people to function. This give everyone a need to reduce debt, and so they sell goods causing the general price level to fall. In addition, a large output gap develops and so producers also need to cut their prices. This results in price deflation. As the general price level falls, so individuals assets become worth less, and peoples ability to sell goods to repay their debts decrease. People on the margin become insolvent. As demand reduces, businesses are forced to make cut backs and unemployment increases. The process is made more painful by the fact that as deflation accelerates, the debt level that was originally unsustainable actually increases.

The point is, this is a vicious circle. it can't be cured by conventional monetary policy, because the natural interest rate is negative, and so even a 0% interest rate actually results in a further contraction of the economy.

This process eventually ends naturally when a large enough proportion of the population declare insolvency to restor the debt level to a sustainable level. But, we are not talking about an 18 month recession here. The GDP contraction is markedly more severe and it can go on for years - the long depression went on for 65 months, Japans depression never really seems to have stopped from the early 90's until it actually engaged in a policy of quantative easing (despite what the TV journalist say, the policy was not followed for years, they just blabbered on about doing it).

The cure that has worked is devaluation and inflation. For example, Great Britain devalued during the great depression and very soon after started to recover. The point is, not to inflate so hard as to remove the debts, but to prevent deflation so that people have the opportunity to pay them down naturally over time.

Wookster

tomterm8 wrote: »

It's not the biggest wrecking ball known to modern man. Deflation (as in, in its formal definition as a generalised reduction in the quantity of money or the velocity of money) IS the greatest wrecking ball in the history of mankind.

What we are seeing is not deflation. It is a correction of overblown asset prices.

tomterm8 wrote: »

This process eventually ends naturally when a large enough proportion of the population declare insolvency to restor the debt level to a sustainable level. But, we are not talking about an 18 month recession here. The GDP contraction is markedly more severe and it can go on for years - the long depression went on for 65 months, Japans depression never really seems to have stopped from the early 90's until it actually engaged in a policy of quantative easing (despite what the TV journalist say, the policy was not followed for years, they just blabbered on about doing it).

QE did not work in Japan. All that excess liquidity was exported overseas to the UK, US and other Western countries (known as the yen carry trade) where it contributed to massive asset price (guess what?) inflation that is correcting now.