More pressure on IRs

Generali

RenovationMan wrote: »

As we all know, tax hikes are just as effective as interest rate rises in reducing inflation

Repeat after me:
"Inflation is at all times and in all places a monetary phenomenon"

Monetary policy will cure monetary problems. Don't be fooled by people that misunderstand Keynes.

Inflation is at all times and in all places a monetary phenomenon

nembot

I agree with Chucky somewhat here, although we all know why interest rates are so low atm and it's got !!!!!! all to do with inflation.

RenovationMan

Generali wrote: »

Repeat after me:
"Inflation is at all times and in all places a monetary phenomenon"

Monetary policy will cure monetary problems. Don't be fooled by people that misunderstand Keynes.

Inflation is at all times and in all places a monetary phenomenon

Quite right, I forgot. Yes, raising and lowering interest rates is the only way to control inflation. Interest rates are also a well known cure for onychocryptosis and condylomata acuminata.

Is there nothing that raising rates cannot do?

Heyman_2

nembot wrote: »

I agree with Chucky somewhat here, although we all know why interest rates are so low atm and it's got !!!!!! all to do with inflation.

Please do enlighten us as to why you think rates are so low at the moment. Don't forget to tell us why they are so low in the Eurozone and the US and lots of other countries as well.

Generali

RenovationMan wrote: »

Quite right, I forgot. Yes, raising and lowering interest rates is the only way to control inflation. Interest rates are also a well known cure for onychocryptosis and condylomata acuminata.

Is there nothing that raising rates cannot do?

Interest rates also cure the germs that may cause bad breath....

Fiscal policy can be used to fight inflation by taxing more than is spent and using the money to pay down debt. The trouble is, that money can then be recycled by banks to create private sector debt so there is no net impact on the money supply.

That problem can be solved by requiring banks to keep more cash on reserve at the Central Bank.

This is roughly the system to control inflation that was tried in the 1970s and it didn't work unfortunately. Increasing interest rates does work as a way of controlling inflation and that is why they will be used if inflation becomes a problem.

As inflation is very far from being a problem, interest rates don't have to rise.

nembot

Heyman wrote: »

Please do enlighten us as to why you think rates are so low at the moment. Don't forget to tell us why they are so low in the Eurozone and the US and lots of other countries as well.

Easy Credit, Opportunity, Realisation, Panic, Low Interest Rates.

I'd be tempted to suggest they are at these levels to aid recovery, would you disagree?

GeneHunt_2

Generali wrote: »

Another reasonable headline would be, "Inflation above target range by smallest reported increment'.

Good point.

Generali wrote: »

It's also worth remembering/realising that the rise in VAT from 15% to 17.5% would have increased inflation by roughly 1.2 percentage points being the entirety and a little bit more of the inflation overshoot (about half of purchases attract a VAT payment thus an increase in VAT of 2.5% would increase inflation by 2.5% x 1/2).

I thought the inflation figure was an annualized monthly figure ? Why would the January VAT rise be reflected in the September figure?

GeneHunt_2

ruggedtoast wrote: »

Its only because of tax, VAT, the end of the scrappage scheme, wheat prices, air fares, peak oil, strikes in the Yukon, etc...

and don't forget cotton

Generali

GeneHunt wrote: »

I thought the inflation figure was an annualized monthly figure ? Why would the January VAT rise be reflected in the September figure?

It is an annual figure. To demonstrate we'll have an economy where you can only buy one thing.

Imagine an item selling for £100 for the whole of 2009. On 1st January 2010 it rises in price to £101 and remains at that price for the whole of 2010 and 2011.

What is inflation in this case? Well in Jan 2010 the price of our good is £101 and in Jan 2009 it was £100 so inflation is 1%. In Feb 2010 we compare the price to Feb 2009 and again it's 1%. That will be the same right through to Dec 2010 where we compare the price of £101 against Dec 2009 where it was £100 and again inflation is 1%.

Now we get to Jan 2011. The price is still £101 and in Jan 2010 the price was also £101 so the inflation rate is now 0%. You will often hear that process described as a price rise 'feeding through' the inflation figure.

In reality of course there are millions of prices in an economy. What the NSO does is take a kind of average of them all and compares the average this year to the average last year.

vivatifosi

Generali wrote: »

Now we get to Jan 2011. The price is still £101 and in Jan 2010 the price was also £101 so the inflation rate is now 0%. You will often hear that process described as a price rise 'feeding through' the inflation figure.

Except that we'll have another VAT hike, so we won't get a true inflation figure until Jan 2012, unless of course VAT is increased again.

The thing that surprises me the most about inflation and VAT increases is that business investment has fallen back so far. As businesses in effect pay the price net of VAT surely that's indicative of an even greater fall than the numbers indicate.