RPI 4.4%; CPI 3.4%; BoE In Denial

kennyboy66_2

Kohoutek wrote: »

Given that, why do people think this inflation rise is a sign the economy is healthier? You'd need to know whether UK oil inventories are lower/consumption is higher to know whether high prices are reflective of higher demand in the UK. The surge in demand for oil is coming from Asia, not the UK.

I would describe the "Goldilocks" scenario as follows.

1) 'Benign' inflation of 1.5-3.0%
2) Public sector wage freezes
3) Continued export growth
4) Economic growth of 2.5% ish.
5) House prices static or small falls.

Some benign inflation is desirable as it will be difficult enough to enforce wage settlements at 0-1%. It would be many times harder to persuade public sector workers to have a cut in their pay.

Some inflation will also (hopefully) reduce real house prices if nominal prices are static. This was roughly the experience in the period post 1991 recession.
It means that people are not in negative equity and at least are able to move in search of employment if necessary.

Some inflation is also enourmously helpful to the banks. It is nominal falls and their customers not being able to service their debts that is damaging.

All in all, the BoE is playing a blinder - although the "innocent victims" are the many savers out their. However isn't this what people are moaning about HPI being a huge transfer of wealth from young to old. Poor savings rates just works the other way.

Kohoutek

kennyboy66 wrote: »

I would describe the "Goldilocks" scenario as follows.

I agree, but wage freezes and inflation in the cost of petrol, food etc caused by rising oil prices is hardly an ideal situation - it implies standards of living will fall noticeably. It's inevitable, but it has the potential to create a lot of problems for people on modest incomes.

kennyboy66_2

Kohoutek wrote: »

I agree, but wage freezes and inflation in the cost of petrol, food etc caused by rising oil prices is hardly an ideal situation - it implies standards of living will fall noticeably. It's inevitable, but it has the potential to create a lot of problems for people on modest incomes.

No one should be under any illusions that in general living standards will fall (modestly) over the next few years and there will be some winners and some losers.

However, this is the "least worst" option.
The catastophic scenario would be deflation on a scale that the Irish have experienced.
This would mean negative equity on an unprecedented scale and significant cuts in all benefits.

Conrad

kennyboy66 wrote: »

The catastophic scenario would be deflation on a scale that the Irish have experienced.
This would mean negative equity on an unprecedented scale and significant cuts in all benefits.

Kenny, what are you getting at here?

May as well say I better not eat fish in case of mercury deposits or I better not listen to my ipod in case I don't hear that motorcycle thats about to run me down.

We all live on the edge of the prescipice from birth to death dont we?
But what to do about it?

JamesU

jim83 wrote: »

Here's an interesting measure supplied by the ONS: Tax and Prices Index (TPI)

According to the ONS, this "shows how much taxpayers’ gross income needs to change in order to maintain their spending power after taking account of the tax that has been deducted as well as changes in prices."

Will be interesting how high this goes after the election.

Hmm. SteveJ is actually right. The TPI is superimposable on RPI which does not make sense to me (Correction: nearly superimposable, see post below). So the ONS seems to be simply saying that you can work out how much extra you need to earn earn by looking at the change in RPI and we call this comparison TPI=RPI? And no factoring for changes in taxation (which ones? relevant to who? probably impossible to generalise anyway given individual tax positions?) relative to RPI seem to have been incorportated by ONS, so may not be of much use in the future. Great stuff, perhaps TPI can go for a start as part of efficiency measures.

JamesU

Kohoutek

significant cuts in all benefits

Maybe some of those should be cut though? It's hardly fair that people many people in the private sector, and soon the public sector have their wages frozen, but benefits continue to rise with RPI.

kennyboy66_2

Conrad wrote: »

Kenny, what are you getting at here?

May as well say I better not eat fish in case of mercury deposits or I better not listen to my ipod in case I don't hear that motorcycle thats about to run me down.

We all live on the edge of the prescipice from birth to death dont we?
But what to do about it?

?????

Only making the point that it's much better to overshoot a little on the inflation target, than to get sucked into a deflationary spiral.

All the BoE policy over the last 18 months has been to avoid deflation - and they are dead right to do so.
It is not about propping up the housing market, that just happens to be a side-effect.

The problem with deflation is that no one really knows how to get out of it. Some (Dopester for example) would argue that it just has to play out.

kennyboy66_2

Kohoutek wrote: »

Maybe some of those should be cut though? It's hardly fair that people many people in the private sector, and soon the public sector have their wages frozen, but benefits continue to rise with RPI.

Maybe they should, although again it would be easier to freeze them in an environment of 2% inflation.

In addition, the first benefits to be cut will be things like working family tax credits, child tax credits, making child benefit taxable and perhaps housing benefit (some combination seems likely after the election).

I suspect what you mean is cutting benefits to the 'undeserving & workshy'.

Surely the best way of tackling this would be actually getting people weaned off Incapacity benefit rather than cutting it by a couple of percent.

Kohoutek

kennyboy66 wrote: »

Surely the best way of tackling this would be actually getting people weaned off Incapacity benefit rather than cutting it by a couple of percent.

If the next government can, but no government for years has made any real effort to do so. I think it's inexcusable to keep the freebie benefits - free TV licences, winter fuel allowance (unless you're actually poor), bus passes , child trust fund etc.

You're right, freezing the other income based benefits would probably be more appropriate than cutting them.

Really2

Kohoutek wrote: »

I don't follow. You're arguing that increased Asian demand for oil is coming specifically from increased demand for Asian goods from the UK? I thought the UK's recovery was an 'export led' recovery, not an 'import led' one.

Not specifically from the UK but I dare say the demand for asian made goods this year is higher than this time last year.

Some goods are always going to be cheaper to buy from asia so you are kidding yourself if you do not think their use of oil is not linked to external demand also.

What happened to oil when demand fell for asian products?