Deflation Part III

Really2

lemonjelly wrote: »

I tenatatively agree. My concern is that the growth is not necessarily sustainable. I think part of this is down to a public perception of back to growth pre-crunch.

Personally I feel there is the real possibility of more than a year of stagnation, with the real likelihood of falls once QE stops.

I do think that VAT rising, & ongoing rises in oil prices will have an adverse impact on the economy.

To me, essentials such as food, fuel, petrol seem to almost be spiralling upwards (a little melodramatic I'll accept), but they're climbing, & I'm not in a position to be really hurt by it. But there are many around me, friends, family etc who do appear to be having a real struggle.

As such, when the QE money comes into the general economy, money supply goes up, together with VAT and the rest, I feel there will be inflation.

But if you think the economy will be in poor health for a long time that will be deflationary.

If everything shot up in value so in reality would GDP in terms of £'s

There should be inflation that is the aim, just not strong inflation.;)

lemonjelly

Really2 wrote: »

But if you think the economy will be in poor health for a long time that will be deflationary.

If everything shot up in value so in reality would GDP in terms of £'s

There should be inflation that is the aim, just not strong inflation.;)

I may be showing my Naïvet! , however I'm not convinced that prices (especially of essentials - food, fuel, warmth) going up, at the same time as unemployment is a good thing for the economy...

Really2

lemonjelly wrote: »

I may be showing my Naïvet! , however I'm not convinced that prices (especially of essentials - food, fuel, warmth) going up, at the same time as unemployment is a good thing for the economy...

Food and oil inflation can not be put down to our QE. (I think i mentioned before they are the only two I can see inflating strongly) They are something the world will have to put up with.

But unemployment most certainly is not inflationary.;)

QE money can be withdrawn as fast as it was put in.

But you can take the price of oil rising as a scale on how world economy's are improving.:)

edit.
i should add spending more on heating and food causes deflation in other areas. The less you have in your pocket after you have paid the bills means other prices are likely to remain subdued due to weak demand.

amcluesent

I'm struggling to see that Britain will enter a deflationary period. Although there will be examples, the overall scenario looks to be inflationary (or stagflation).

Generali

chucky wrote: »

why would the BoE continue to need to throw more QE at the issue?

surely the economy seems to be gathering some momentum that will allow this to stop.
the pound seems to think this from today's reaction?

To some extent that's true. However, consumer credit problems tend to shadow unemployment rather than GDP and consumer credit defaults will continue the problem of M4 not rising and so the risks of deflation are likely to remain.

The unwinding of QE should be inflation neuteral as long as it doesn't go so far that the total amount of QE > the increase in bank reserves now required as all that is likely to happen (the Government presumably hopes) is that banks will swap cash on their balance sheets for Gilts. Both are Tier 1 capital AIUI so long as the UK Government retains her AAA credit rating and there's no sign of it changing as yet.

Generali

Just a further quick thought.

If prices are rising (as Mr Mumble has pointed out, this is quite possible due to commodity prices coming off lows) but the money supply is rising only slowly as banks aren't lending money, what happens?

I don't really know the answer but my guess is that it would cause a drop in consumption which would presumably lead to a further fall in GDP.

lemonjelly

Prices certainly seem to be rising to me Gen!
Fuel & petrol are the biggies.

If those costs are passed on to consumers, & therefore prices rise, won't that be inflationary? Will imports be more expensive owing to the fuel costs?

I appreciate people might not have the money to buy the stuff with, but asking prices may well be pushed upwards.

Generali

lemonjelly wrote: »

Prices certainly seem to be rising to me Gen!
Fuel & petrol are the biggies.

If those costs are passed on to consumers, & therefore prices rise, won't that be inflationary? Will imports be more expensive owing to the fuel costs?

I appreciate people might not have the money to buy the stuff with, but asking prices may well be pushed upwards.

Well as you may be aware, I now live in Australia so I miss the annecdotal stuff like how much it costs to fill the car.

Fundamentally though, if prices are rising but the amount of money around to buy things is falling then surely all that can happen is that less stuff is bought(?) at the higher price. That would lead to companies that are left unable to sell enough to cover their costs going bust, leaving enough customers for those that remain to survive and eventually thrive, hopefully.

Perhaps this is a signal that people that think stagflation is the future for the UK economy are right. Perhaps QE will eventually start to 'work' and money supply (M4) will rise and inflation will take off or at least stop falling.

Really2

lemonjelly wrote: »

Prices certainly seem to be rising to me Gen!
Fuel & petrol are the biggies.

I disagree fuel has risen. Gas and electricity are nearly 10% down on last year.

Petrol is up. But Diesel near me is £1.029 I think even at it lowest early this year £0.899 and that was there only briefley, for most of the time when oil was low it was around £0.929 - £0.959.

I think the rise in petrol has been higher but as a cost to business and price inflation diesel is the barometer not petrol.
Fuel stats below
http://www.theaa.com/motoring_advice/fuel/aa-fuel-price-review-2008.html
http://www.theaa.com/motoring_advice/fuel/index.html

lemonjelly

Generali wrote: »

Well as you may be aware, I now live in Australia so I miss the annecdotal stuff like how much it costs to fill the car.

Fundamentally though, if prices are rising but the amount of money around to buy things is falling then surely all that can happen is that less stuff is bought(?) at the higher price. That would lead to companies that are left unable to sell enough to cover their costs going bust, leaving enough customers for those that remain to survive and eventually thrive, hopefully.

Perhaps this is a signal that people that think stagflation is the future for the UK economy are right. Perhaps QE will eventually start to 'work' and money supply (M4) will rise and inflation will take off or at least stop falling.

ISWYM.

This recession is really confusing for me. I half agree and half disagree with pretty much everybody!