CPI Up to 3.7% RPI Up to 4.8%

Really2

A._Badger wrote: »

Stagflation here we come.

It's time since I have seen that on here, a lot of bears said it would happen. But I kind of think they hoped it would happen with a 5%+ base rate as it has dissapeard since rates fell.

Kohoutek

To be fair to Mr King, his (real) predictions haven't been bad at all...

14 February 2008

Britons have enjoyed a decade of high spending on luxury goods, holidays and second homes, fuelled by low interest rates, easy credit and near-record lows in living costs.

But Mervyn King, the Governor of the Bank of England, issued a stark warning that this period had come to an end.

In an uncharacteristically blunt statement, he said rising inflation and the fallout from global economic turmoil would take its toll on the spending power of British households.

Mr King's warning came during his most sombre assessment of the economy since he took over as Bank of England Governor five years ago.

"The higher level of energy and food prices is a genuine reduction in our standard of living relative to where it would otherwise have been," he said.

"This is because of the higher prices that all of us are having to pay."

http://www.telegraph.co.uk/news/uknews/1578634/Standard-of-living-will-fall-warns-Mervyn-King.html

A._Badger

Really2 wrote: »

It's time since I have seen that on here, a lot of bears said it would happen. But I kind of think they hoped it would happen with a 5%+ base rate as it has dissapeard since rates fell.

I can't see much alternative, I'm afraid. Costs are going to increase due to international factors, quite regardless of what happens locally and our government clearly hasn't the vaguest idea how to stimulate growth, nor how to cut expenditure.

Oh God, I've morphed into Private Fraser.

Kenny4315

As expected really, suspect will test water with a 0.25% rate increase at next meeting.

Get your loot ready for the end of the year/early next year as that will be the prime time to buy. Rates still pretty low 1.5%, house prices down on current position, 12%, borrowing becoming relatively easier. Job sorted.

Heyman_2

Joeskeppi wrote: »

I still can't see what difference an IR rise will make to inflation, especially the ~0.5% people are talking about.

It won't make any difference to inflation, but it'll make Savers happy and give the Daily Fail something to write about for the next 18 months.

Graham_Devon

Some things that I've picked up today...

Sterling rose to $1.60 as traders factored in earlier than expected rate rises. This confirms my own view and tanglings on here that interest rates DO have an affect on the exchange rate.

On a monthly rate, the increase was the highest ever recorded.

John Redwood (conservative) has told the BBC that the BOE are not sticking to their remit. Maybe their remit needs to be looked at if they want to target output, instead of targetting inflation as per their remit.

Another commentator (didn't catch who they were) stated that the BOE needs to carry out a token interest rate rise to show the country they are not simply sitting on the fence.

There are also fears that, in the main, public sector workers will take action on small payrises, in the face of high inflation, causing a headache for the current government, and maybe even an increase in wage costs for the government if the workers win.

And an excellent (in my mind, but obviously not in others...) point, made by Simon Ward, Henderson Global Investors:

“It has recently become fashionable to quote the tax-adjusted inflation measures, CPI-CT and CPIY, which are running well below headline inflation, at 1.9% and 2.0% respectively (up from 1.5% and 1.6% in November.) CPI-CT is calculated at constant tax rates while CPIY excludes indirect taxes altogether.

“These measures, however, understate "true" inflation because they are calculated on the assumption that indirect tax hikes are passed on in full to consumers. ONS research on the December 2008 VAT reduction from 17.5% to 15% indicated pass-through of only one-third. Assuming that one-half of the increase in VAT and other indirect taxes last year was reflected in the prices charged to consumers, inflation would now be about 2.8% had tax rates remained stable.

“The current inflation overshoot should be viewed in a longer-term context. The consumer prices index for December was 4.4 percentage points above the level implied if the Bank of England had achieved 2% inflation since the target was switched to the CPI in December 2003, implying an average overshoot of 0.6% per annum. The RPIX measure (i.e. retail prices excluding mortgage interest costs) has exceeded the previous 2.5% inflation target by 5.3 percentage points over this period.

"Advocates of a rise in interest rates are not "inflation nutters" but believe that believe that action is required to prevent an upward drift in inflationary expectations that would worsen the output-inflation trade-off, thereby depressing medium-term growth prospects.”

Stephanie Flanders resonse to the above isL

The point is well made. It is simplistic to look at CPIY or CPI-CT and say, just because they are below 2%, there is no reason to worry. After all, those aren’t the measures of inflation that the MPC is legally obliged to target. Nor do they correspond to any common understanding of inflation. When we get to the check-out, we can't ask the cashier to charge us only at "constant tax rates". We have to pay the whole lot.

They should both pop over to this forum

Really2

Graham_Devon wrote: »

This confirms my own view and tanglings on here that interest rates DO have an affect on the exchange rate.
[/INDENT]

They do, but how much we can raise it is the problem. Even to get parity on oil costs we need $2.13.

The second problem then is a stronger £ means exports cost more, meaning possible drop GDP and £.

The third problem is people and companies have less to spend, falling GDP, falling £.

So they have an effect on exchange, but also moving can cause exchange to fall if the reason you raise it does not change the problem. Possibly makes it worse.

No one has ever argued otherwise, just that where we are we have very little room to manover.
We cant bring inflation down, we can just do token rises in the hope they don't damage GDP to much.

Graham_Devon

Really2 wrote: »

They do, but how much we can raise it is the problem. Even to get parity on oil costs we need $2.13.

I'm, and I don't think anyone else, is not saying we need parity. What is being said is we need to slow down the increase in inflation.

I was talking about putting the brakes on the speed of the increase last week, directly to you, but it seems you forget everything I say and move to the extreme all the time....You seem fixated on fixing the problem entirely....or doing absolutely nothing. If we can't fix it in its entireity, we'd better do sod all. I'm looking at the middle ground, simply reducing the speed inflation is accelerating ahead.

I said in the last week, no interest rate rise is goign to stop the type of inflation we have, only reduce the speed at which it builds up. Though seems youd rather just ask me over and over again how interest rates will STOP or REDUCE inflation when I've already said it wont.

I'm not calling for parity. I'm calling for a reduction in the acceleration....well, at least looking into way of reducing the acceleration.

As for output....we can't simply leave the rest of the economy to screw the population over so that we can export some goods.

Hell...the rise for those on benefits will likely be at least double, if not more, than the rise public sector workers get...and thats WITH a move to CPI. No good having good export conditions if you can't hire staff as those on the factort line jobs are far better off on benefits.

StevieJ

Hooray, I had a look at that personal inflation checker and it made it obvious what I should be doing to make my income go further in relation to RPI.

Spend a higher proportion on booze :beer:

Graham_Devon

So you're in favour of increasing the UK's current account deficit and damaging the export sector, a large contributor to recent economic growth, to temporarily jack up the value of sterling?

Errr, no.

If a half to 1% rise in interest rates would do all that, then we have far more issues, far more serious issues as a country, than interest rates going up.

Were at 0.5% rates. If talk of raising them, and I don't see anyone talking of over 2% this year, makes the whole house of cards fall down, then we may aswell give up now, and call the IMF.