Interest rates , Inflation , Wage inflation am i wrong ?

roswell

Hi,

First off If thsi is in the wrong place please forgive me or move it but i have a question to ask and thoguht this may be the board of most experiance.

I have been thinking about the BOE target of 2% inflation and the change in interest rates to 5% to, wage inflation is currently in the region of 4 %.

At what point witht he BOE stop raising interest rates to keep inflation in the 2% mark ? My thoughts are that if inflation is 2% wage inflation is double inflation target its goign to impact inflation surely ?

More to the point if interest rates hit say 10 % to keep inflation at 2% wouldnt the county become bankrupt ?

or have i got this all wrong ?

Milarky

No one's got a crystal ball but inflation is contrained by non-domestic factors (cheap Chinese goods) as well as boosted by those external factors (higher energy prices - even after recent falls in the price of oil) which nothing the BOE does can really affect. That just leaves the housing market as far as I can see since there is no manufacturing (what is it - 7% or 17% of the economy?) these days. While the 'city' alone represents a huge (I won't say what) 25% of the economy.

Inflation thus stated is a mixture of probably -2% imported prices and +6% domestic prices - and that's just on on the 'lowest' measure 'CPI' - the light blue line below, and the one they now like use.

[So you're not far wrong in assuming that 'real' inflation is probably at least 4%]



What's 'true' Retail Price Inflation? (RPIX-X?) I wonder - I think they must be hiding it somewhere on the National Statistics website!

Here's what I've dug out

Period...........'RPI'..........'RPIX'.........RPI>RPIX

2005...10 .....2.5 ............2.4 ............0.1
2005...11 .....2.4 ............2.3 ............0.1
2005...12 .....2.2 ............2.0 ............0.2
2006...01 .....2.4 ............2.3 ............0.1
2006...02 .....2.4 ............2.3 ............0.1
2006...03 .....2.4 ............2.1 ............0.3
2006...04 .....2.6 ............2.4 ............0.2
2006...05 .....3.0 ............2.9 ............0.1
2006...06 .....3.3 ............3.1 ............0.2
2006...07 .....3.3 ............3.1 ............0.2
2006...08 .....3.4 ............3.3 ............0.1
2006...09 .....3.6 ............3.2 ............0.4

As you can see there is a systematic bias in even RPIX (it is consistently less than RPI for each month in the last 12 months - but this should even out.) And look at the level compared to 'CPI' - what the BOE officially targets

Gorgeous_George

Raising interest rates to rein in consumer spending hits borrowers. The more wealthy savers benefit from increased interest on their savings. So, while the average Joe feels the pain and reins in his spending, Mr Moneybags has moreto spend. Inflation doesn't fall as much as needed so IRs rise again.

How much better would it be to increase the upper tax rates?



GG

roswell

Well my personal opinion on income tax is it is out dated by a long run and should move up to no tax first 20 K, 22% there after and 40% at 50K or above.

So Guess Im right in thinking although the BOE is trying to control inflation it cant actually do anything except offset it a little bit with interest rates, which means at some point they would need to scrap there 2% imaginary target or risk recession.

ManAtHome

Probably GB(H)s next task after redefining the economic cycle to coincide with the half-life of plutonium. It will be "A Good Thing" if the inflation limits are raised to 50% to make the million quid starter-home in 2024 more affordable...

cloud_dog

Gorgeous_George wrote:

Raising interest rates to rein in consumer spending hits borrowers. The more wealthy savers benefit from increased interest on their savings. So, while the average Joe feels the pain and reins in his spending, Mr Moneybags has moreto spend. Inflation doesn't fall as much as needed so IRs rise again.

How much better would it be to increase the upper tax rates?



GG

Apologies but, what utter garbage.

Speaking as a not particularly affluent person, measured inflation is the average of a basket of prices (the constituents of which are adjusted, re-profiled, to suite a need - politicians normally). Real inflation is the increase in the money supply which, in essence, devalues your £ and thereby increases the cost of real goods.

This is why having an inflation target and keeping inflation in check benefits the economy (over the long term). Having said that a short period of raging inflation, or devaluation of a currency can get a country out of a hole.

cloud_dog

Chrismaths

The problem with "tax the rich" is that the rich can afford to pay for very clever and devious tax advisers - and 40% is a sum worth avoiding. Before Maggie came to power, we had a highest tax rate of 98% (80% income tax plus 18% investment supplement). When the top tax rates were cut, income tax receipts increased, and the proportion of revenues coming from the top tier of earners also increased. Whatever else George Dubya Bush has done, he implemented tax cuts on dividend income - something that every democrat and left leaning person opposed as "tax-breaks for the rich". What happened was that of the increased revenues since that time, a greater proportion of tax has come from the wealthiest people. Instead of squirrelling away their money offshore, or in rinky-dink tax schemes, they think "it's not worth paying the tax adviser 10%, when the tax is only 15%". If you take away the incentive to avoid tax, you actually raise more money, and more money from rich people. Combine that with the increase in growth that would come from leaving money in people's pockets rather than the governments, and a flat tax becomes very appealing.

melbury

What I don't understand about how they work out the inflation figure is that so many items are removed from the equation to keep it looking low - e.g. house prices for one. It seems that the government manipulate the figures to suit themselves. Surely inflation should take everything into account and not just what suits the government.

cloud_dog

melbury wrote:

What I don't understand about how they work out the inflation figure is that so many items are removed from the equation to keep it looking low - e.g. house prices for one. It seems that the government manipulate the figures to suit themselves. Surely inflation should take everything into account and not just what suits the government.

Its the way its always been, its not limited to a particular party, and its not just the actual inclusion of items it depends on their weighting.

Japan is a good example, where recently they raised interest rates from 0 to 0.25%. The inflation figures going forward indicated the (probable) need for a nother rise and Bank of Japan governers had indicated this was likely. The politicians didn't want another rise as they thought it may stop the resurging economy from continuing its growth (thereby voters feel good factor) so within approx 2 months of the inflation figures being released they changed the basket and re-quoted the inflation figure, thereby negating the evidence the BOJ had for raising rates again (at least in the intermediate future).

In the U.S. their inflation rate is 4.??% (I think) but the general consensus is that it is probably nearer 8%.

cloud_dog

surfcat

Gorgeous_George wrote:

Raising interest rates to rein in consumer spending hits borrowers.

GG

It's meant to hit borrowers, that's the point. If people weren't remortgaging all their house price 'wealth' and spending it on tat we wouldn't have a problem. Equally if buy-to -let !!!!!! weren't speculating on the housing market and actually allowed people to buy homes to live in then house prices wouldn't be so high and we wouldn't have to worry about our trillion pounds of debt.

The problem for the BoE is that costs of housing capital repayment are not in the basket, thus massively rising inflation is masked. Putting in capital repayments would provide a neat mechanism for killing HPI via rising interest rates if necessary.

Chrismaths

It always depends on what your basket of goods is. If you are buying an LCD HD-ready screen, you're experiencing inflation of -25% pa. If you are buying petrol, over the first 9 months you've had inflation of maybe 15%. Since then we've had inflation of -10%.

The problem with including everything is that the month on month figures are so volatile as to defy analysis. So they end up chucking out houses, or fuel, or food, or whatever. They also make hedonic adjustments - so although an entry level computer has risen 10% in a year, it's now twice as good, so the price has fallen - very dubious. But the fact remains that they need A figure they can look at monthly, and the RPIX wasn't bad for that purpose. The CPI was a sop to El Gordo's Europhile backbenchers, and can safely be ignored when looking for "real inflation". RPI is still probably the best measure.

Add a bit for luck if you feel like it, but the next time you buy something cheaply online, remember that it is not (just) your skill, that is also deflation. People tend to attribute things they get more cheaply (in a sale or online) to their own skill, and things that are more expensive to nasty, nasty inflation. So perceptions are not always trustworthy.

I've probably seen more rubbish written about inflation than any other subject, (bar investment bonds when Ed's in town ), I saw someone say that M4 was running at 13% so that was what inflation really was. It just shows that they don't understand what M4, or inflation really is.