MSE News: Inflation up again - will base rate rise soon?

Former_MSE_Guy

This is the discussion thread for the following MSE News Story:

"The RPI measure stood at 4.8% in December, up from 4.7%. Must the Bank hike rates to keep prices under control? ..."

Read the full story:
Inflation up again: will base rate rise soon?

SnowMan

First of all must say how pleased I am to see the RPI increase reported in the article and thread starter rather than CPI :T

It seems that one of the government means to reduce inflation is to invent an index that understates inflation (i.e. CPI) pretend that it does reflect inflation, when all the statisticians say otherwise, and then set monetary policy to that new target.

It is a familiar government ploy. We have seen when employment was rising in the past that the government of the day takes unemployed people out of the statistics as a method of reducing unemployment. The reality is that it is a sleight of hand not a solution to unemployment.

It does seem likely that with current monetary policy that real inflation as experienced by real people is in danger of getting out of control and looking at the Bank of England yield curves does seem to indicate (to someone who claims no expertise at interpreting these graphs) that base rate will have risen by 0.25% by about May time.

One of the Bank of England monetary commitee has been voting for a 0.25% increase in base rates and it is hard to believe that given their remit that he won't have company soon amongst the rest of the committee and we will see an increase.

The government fear that a base rate rise will stifle economic recovery of course so may be putting pressure on the committee, despite their supposed independence. But the counter-argument to leaving base rates where they are is that letting inflation get out of control will require a steeper rise in base rates in the future.

Inflation getting out of control does seem to be a UK problem.

Milarky

SnowMan wrote: »

It does seem likely that base rate will have risen by 0.25% by about May time.

This made me think of the May local elections - they won't move rates in April for those reasons, but the day after the polls - and many, many many months delayed there IS actually a window to signal a change of policy.

May also coincides with market sell-offs, does it not? These annual patterns cannot be any coincidence I feel.

And I agree 100% with the remarks concerning CPI v RPI.

lvader

They will want to see the effect of this years VAT increase and other cuts before making a move, otherwise they could be increasing interest rates just as the UK moves into recession.

guitarman001

http://uk.finance.yahoo.com/news/Millions-savers-need-6pc-beat-tele-1157485272.html?x=0

Imagine if house price rises were included over the last decade... we'd have seen hyper-inflation lol. As long as house prices remain static (I think they'll fall a lot, though) and my savings keep building up, myself and other youngsters could POSSIBLY have a life with less debt...

StevieJ

Don't panic :eek:

But consider the potential fall-out if they did swerve from their current course, particularly over the next few months. With forecasters predicting a slowdown in growth to around 0.5% in the last quarter and an even slower 0.3% in the opening three months of 2011, how "credible" would it be to start reaching for the interest rate levers? The Bank needs to be tightening policy from a position of strength, and unfortunately we aren't there yet.

http://www.thisislondon.co.uk/markets/article-23915124-mervyn-king-must-keep-a-cool-head-as-banks-credibility-comes-under-fire.do

Milarky

http://www.statistics.gov.uk/cci/nugget.asp?id=19

CPI Index:
Now
2010 Nov 115.6
2010 Dec 116.8 U

12 months ago
2009 Nov 112.0
2009 Dec 112.6 U
2010 Jan 112.4 D

24 Months ago
2008 Nov 109.9
2008 Dec 109.5 D
2009 Jan 108.7 D

All the 'big risers' appear due to the usual: 'things went up MORE than they went up this time last year'.

BUT remarkably, the one 'big faller' identified was due to a: 'Things still went up this time, they just went up MORE last time' argument

So everything seems have gone up last month - without exception

Look out for NEXT month's figure, however - CPI/RPI usually falls in January (and July) If CPI doesn't go down by at least 0.2 'Inflation will be unchanged. If (eg) it goes UP '0.2' [to 117.0] that will take us to '4.1%' [117/112.4]

Finally, it is without irony that they explain why CPI went up more than (out of line with) RPI last month:

the main driver for the upward contribution was due to the weight for air transport being higher in 2010 compared to 2009. This means that the sharp rise in air fares between November and December this year (41.8 per cent) had a larger upward impact on the CPI compared to a year ago

Loughton_Monkey

SnowMan wrote: »

First of all must say how pleased I am to see the RPI increase reported in the article and thread starter rather than CPI.....

Yes. Isn't it a 'coincidence' that the BBC - totally independent of Government of course - chooses to headline CPI at about the same time as the Government has devalued pensions to CPI?

The last time I saw such a striking 'coincidence' was 15 or so years ago, when 'UK Ltd' started making a loss [Balance of payments including invisibles], this measure was all of a sudden missing from any major reporting, and replaced by "GDP". In many ways, this is an equivalent of a company reporting profits every year. The minute it stops making a profit, it starts reporting Turnover instead. "Ooh look what good boys we are. Turnover up over 10% two years in a row...."

Turnover is 'good'. But only if you are making a profit. Otherwise, you are simply speeding up the rate at which the ship will sink.

Increased GDP is 'good'. But only if Balance of Payments is positive (or to start with less negative). Otherwise, all we are doing is paying each other to knit jumpers and make sandwiches for one another instead of doing it ourselves, thereby churning money around the system very well - but eventually we are arranging deckchairs on the Titanic.

Milarky

Loughton_Monkey wrote: »

The last time I saw such a striking 'coincidence' was 15 or so years ago, when 'UK Ltd' started making a loss [Balance of payments including invisibles], this measure was all of a sudden missing from any major reporting, and replaced by "GDP". In many ways, this is an equivalent of a company reporting profits every year. The minute it stops making a profit, it starts reporting Turnover instead. "Ooh look what good boys we are. Turnover up over 10% two years in a row...."

I thought the non reporting of the 'balance of payments' was due to the Single European Market [1992]?

Also Peter Jay, when did he leave? Recall that his reports would always harp on about 'below trend' GDP (meaning that you considered a 'recession' to be having unused capacity rather than GDP actually falling) It's like there were 'gold standard' economic explanations used in the past and then - in a short space of time - new 'paradigms' of journalism emerged which finessed all these 'difficult' problems away - replacing them with more cut down reportage.

FACTOID: UK balance of payments went negative in 1983 and stayed that way. It's a fact that never [STRIKE]changes[/STRIKE] goes out of date

poppy10_2

MSE_Martin wrote:

How much longer can the Bank's Monetary Policy Committee keep rates low when their main charge is to keep inflation down, when the latter just isn't happening.

The article assumes that increasing interest rates will keep inflation down. While this is true in normal circumstances, in the current economic climate, the opposite is in fact the case - raising interest rates is likely to further exacerbate inflation.

In a 'normal' economy, inflation is related to demand - people and businesses buying shiny new things on credit. Increasing interest rates increases the cost of borrowing, surpressing demand and discretionary spending, and thus forcing prices down.

In the current situation, demand is extremely weak. The high inflation is not being caused by UK consumers rushing to buy things. Rather, inflation is high and currencies are undervalued in other parts of the world (particularly China, from where we import a lot of our goods), and therefore the cost of supplying goods to the UK has increased. Global fuel and food prices are soaring, and raising UK interest rates will do nothing to surpress these. Instead, it will just raise prices further, as businesses pass on increased costs. It would be financial suicide.

What we really need is for China et al to increase the interest rates, not us.

Milarky

poppy10 wrote: »

The high inflation is not being caused by UK consumers rushing to buy things. Rather, inflation is high and currencies are undervalued in other parts of the world (particularly China, from where we import a lot of our goods), and therefore the cost of supplying goods to the UK has increased. Global fuel and food prices are soaring, and raising UK interest rates will do nothing to surpress these. Instead, it will just raise prices further, as businesses pass on increased costs. It would be financial suicide.

What we really need is for China et al to increase the interest rates, not us.

This is now the standard MPC defence, isn't it? They can't affect 'real' prices in the economy, just asset-based price levels, through changing interest rates. In other words, it's the 'wrong type' of inflation for the chosen policy club. Ahh but then they were going to 'restart' the economy with [STRIKE]printing money[/STRIKE] QE, weren't they.