Economy set for "Tripple Whammy"

michaels

But the only way to drive down inflationary expectations and avoid the shock being converted into a wage-price spiral may be to raise rates and choke of demand, increasing spare capacity and as you state at the same time adjusting the exchange rate to counter act some portion of the commodity price increase. (See 1970's for example of what happens if you don't squeeze out the inflation)

Really2

michaels wrote: »

But the only way to drive down inflationary expectations and avoid the shock being converted into a wage-price spiral may be to raise rates a choke of demand, increasing spare capacity and as you state at the same time adjusting the exchange rate to counter act some portion of the commodity price increase. (See 1970's for example of what happens if you don't squeeze out the inflation)

See that is the difference this time, the bold bit aint going to happen. I am happy to be proved wrong, but I am fairly sure we will not see rampant wage inflation.

We will have, general inflation with wage inflation lagging, eroding asset values in real terms but only for those lucky enough to get wage increases.

Generali

Really2 wrote: »

Why would you increase rates with stagflation, you may lower incoming inflation a bit on currency adjustment, But all you do then is increase your lending costs to businesses etc (so basically tip yourself in to recession).

If you get a commodity shock EG oil 2007 regardless what you do, you are going to get inflation. So raising rates while the economy was stagnant would have been to the detriment of the economy,
The end of 2007 is perhaps a great example and the rate increases did nothing to curb the inflation it just tipped the economy over the edge.

Doesn't stagflation come from a mix of the costs of high inflation and high levels of state ownership of the economy? It can't exist for long in a market economy as high inflation => inefficient allocation of resources => low GDP growth => people getting the sack => lower wages (or rising more slowly) => less inflation.

In the 1970s in the UK, the Government and to a lesser extent the private sector couldn't or wouldn't fire people and unions had the power to keep wages going up despite the economy performing badly.

The only way out of the spiral was to allow market mechanisms to work. Monetarism, possibly inappropriately applied, killed the inflation but may have made things worse for the rest of the economy.

Wookster

For me the key point is:

But Mr Dale added: "Since the spring of 2006 inflation has been above target for 41 out of 50 months and for two years it has averaged over 3 per cent. Now, we can come up with all sorts of clever and real reasons to explain our view but at some point people will say 'inflation just seems higher than it used to be' and that is a very substantial risk."

How long will the BoE be able to keep interest rates low in the face of these statistics?

chucky

since when have the government inflation figures now become so credible...

Really2

Generali wrote: »

Doesn't stagflation come from a mix of the costs of high inflation and high levels of state ownership of the economy? It can't exist for long in a market economy as high inflation => inefficient allocation of resources => low GDP growth => people getting the sack => lower wages (or rising more slowly) => less inflation.

In the 1970s in the UK, the Government and to a lesser extent the private sector couldn't or wouldn't fire people and unions had the power to keep wages going up despite the economy performing badly.

The only way out of the spiral was to allow market mechanisms to work. Monetarism, possibly inappropriately applied, killed the inflation but may have made things worse for the rest of the economy.

Indeed that is why I used 2007 as a recent example, economy was wobbling, inflation was shooting up due to the oil bubble. Rates put up to combat it, that did not touch it, in the end we crashed and had to be rebooted in safe mode:)

I can't see any way you could have a sustained period of stagflation in the end monetary policy or spending constriced through inflation or rampant inflation has to tip an economy in a direction.

But I really can't see us heading for stagflation, wage inflation just is not going to happen. Even the public sector are flaging that to us with below inflation rises.

phil_b_2

HAMISH_MCTAVISH wrote: »

The biggest crisis since the great depression, and living standards will still increase.

Excellent news.:beer:

Yea I thought we were supposed to be going back to 1940's rationing etc?

I'd best cancel my order for those rifles, hunting clothes and tinned food supplies.

Graham_Devon

Is it just me? it probably is. But, it seems everything but everything will put us back into a recession....

Last time round, we decided to increase the debt to get out of recession.

Now we find ourselves in a situation whereby if we remove any single measure we have implemented, we could find ourselves back in recession.

The answer therefore, is more debt, more QE.

So, in another 12 months time, we find ourselves in the same situation, unsustainable policies and unsustainable debt, which if we start removing, will tip us back into a hole.

So what's going to be the answer that time? More debt? More QE?

Graham_Devon

chucky wrote: »

since when have the government inflation figures now become so credible...

I dunno. I wouldn't trust any government figures though.

So it's a good job it's the BOE's figures and not the governments were all discussing.

nembot

HAMISH_MCTAVISH wrote: »

The biggest crisis since the great depression, and living standards will still increase.

Excellent news.:beer:

Hamish young man, you do realise during a recession especially this one when IR dropped considerably people tend to have more disposable income. It's the recovery which tends to bite harder and this is still to come.