Gut-busting inflation

Reaper

guitarman001 wrote: »

And even WITH rates held low latest news tells us 1million are in mortgage arrears and struggling.

Rates must be increased!

I see a flaw in your logic.

DiggerUK

Prices going up and down is not inflation or deflation.
It's just that, prices going up and down.

Inflation is a measure of the real trust, confidence, and value of money in circulation. The barometer of that is the price of gold.
Price changes are the symptom of inflation due to currency debasement, not the cause.

A distinction needs to be made between real inflation, and fantasy inflation.

guitarman001

Reaper wrote: »

I see a flaw in your logic.

No, what I'm saying is even with low rates it's not working, so might as well raise them!

Cautious_Investor_3

purch wrote: »

Will increasing the Base Rate reduce the rate of VAT ?

No, I never said it did. But the theory goes that if interest rates rise, inflation will fall.

Cautious_Investor_3

yelf wrote: »

Yeah, but the whole point of curbing inflation is to stop people spending excess money on goods which in turn bumps up the price. An increase in VAT will mean prices go up, but not because of increased spending - therefore increasing rates purely on this basis is no use, as the increase in price is not related to increased spending.

Imagine if every producer of goods in the "CPI basket" increased their prices simultaneously by 5% overnight - would this justiify increasing interest rates to curb inflation?

I take your point, buy VAT will help to push up inflation as a whole and increasing interest rates will help to reduce inflation as a whole.

There are very few other levers (if any) that B of E has to help reduce inflation.

nrsql

If inflation is measured by the price index.
Problem is that VAT increase is going ot happen and on that day the price index will rise (and the annual change will drop again on the anniversary).
This will of course make goods more expensive and people will be able to buy less.
Same as raising interest rates - will cause people to have less money so will be able to buy less goods.

Both effects will eventually cause a reduction in the price of goods so that they become affordable - especially with the short term oversupply.
Problem is that the deflation effect is a lot slower that the inflation effect from the VAT increase.
The question is are we heading for high inflation or not at the moment. Will a rate increase curb bad high inflation or prevent good growth.

Note that with inflation existing debt will be reduced so it's not necessarily a bad thing for those in debt.
As Dunstonh pointed out a £200k mortgage would be effectively worth £140K in 10 years time - a lot less if inflation increases. So all those with interest only mortgages would be watching their payments and debt decrease putting them in a better position. These people would be hit by the rate increase that might benefit savers.

yelf

Cautious_Investor wrote: »

I take your point, buy VAT will help to push up inflation as a whole and increasing interest rates will help to reduce inflation as a whole.

There are very few other levers (if any) that B of E has to help reduce inflation.

Ok, but as NRSQL mentions:

inflation is caused by increased money supply pushing up prices.
Interest rates are increased to reduce the money supply and curb the rise in prices (inflation).
An increase in VAT will mean prices have gone up, but they have gone up via a tax which will be reducing the money supply. So therefore increasing VAT, and then increasing interest rates because of this rise in prices, does not make sense.

Lets say VAT goes up to 40% - this will have a big impact on the basket of goods - but to think that the governemnt will increase interest rates still because of this price rise??? Again, this is not how it works.

sabretoothtigger

Yep its the other way round. vat increase means more tax for government which in theory should help them delay interest rises as they will need less debt to service the governments running costs. Too much debt and supply demand would imply a rise in interest costs and therefore possibly the actual base rate

vat will cause inflation figures to rise though. based on prices it will have to
The year on year figures will only show the correct figure around jan 2012. This is similar to a year onwards from march 2009, from then on everyone went crazy for the NPI index linked things but if you thought ahead, you could buy from march 2009 onwards.
So a year from now, inflation will appear to drop a bit relatively

this is an effective 4-5% drop in prices

yep, thats also to the benefit of anyone with a mortgage. The house value might be effectively zero increase but the debt is also reduced by inflation vs its cost.
If you think inflation will go up, make sure they dont raise the finance costs and fix the rate. This is kinda like the reverse of a savings account, you want to fix as low as you can and it will give a profit

Finance is biggest cost of most people house purchase, #1 saving tip I reckon


In the big picture vat wont be the most important thing. It does help show how the statistics lag the reality I think.

jimjames

What surprises me is the number of people who are unhappy with savings rates but are unwilling to consider any other options such as stock market funds. The dividend rate for many funds is above what you would get in the bank and with the possibility of increase in capital long term. Personally the risk of a drop is outweighed by the better possibility long term but I guess everyone has their own level they are happy with. Variation in your savings of £2000 per day could be too much for some to think about.

I'd be concerned with the statement that 1 million are in arears with their mortgage at the current rates. If that truly is the case it doesn't bode well when rates rise as they will do sometime.

dreamypuma

Breads gone up.