NS&I Question 2

Masomnia

They don't publish constant tax figures for RPI.

But for CPI, the headline rate is 4.5%. Assuming Constant taxes (ie if VAT hadn't gone up) CPI is 2.8%. So that gives you some idea of how much it may affect the inflation rate next year.

Gas and electricty didn't go up with the VAT increase as they're charged at the lower rate of 5%, it was only the top rate that went up.

JamesU

Masomnia wrote: »

They don't publish constant tax figures for RPI.
But for CPI, the headline rate is 4.5%. Assuming Constant taxes (ie if VAT hadn't gone up) CPI is 2.8%. So that gives you some idea of how much it may affect the inflation rate next year.
Gas and electricty didn't go up with the VAT increase as they're charged at the lower rate of 5%, it was only the top rate that went up.

Previous post was in relation to impact of future BoE rate rises on increase in mortgage payments and their subsequent effect on future RPI inflation. With BoE rates having dropped so low it is often felt that as BoE rates rise back up, mortgage payments will rise substantially, and that these would increase future RPI inflation substantially. But the data at hand and calculations suggest this is unlikely to happen?

JamesU

Masomnia

JamesU wrote: »

Previous post was in relation to impact of future BoE rate rises on increase in mortgage payments and their subsequent effect on future RPI inflation. With BoE rates having dropped so low it is often felt that as BoE rates rise back up, mortgage payments will rise substantially, and that these would increase future RPI inflation substantially. But the data at hand and calculations suggest this is unlikely to happen?

JamesU

I'd guess so, and from what Merv has been been saying it looks unlikely.

Looking at the ONS statistics, inflation is on target if you don't count VAT (which of course interest rates can't change). So why would the Bank put rates up unless they expected high inflationary pressure in the next few years? Where's that going to come from with banks not lending and low demand in the economy due to cuts?

Even if the base rate does go up, and that increases RPI due to higher housing costs this is going to be made up for at least in part by an increase in the return on savings.

I hope I'm not giving the impression that I'm against these certificates, because I'm not, they certainly have their place. But I do think given all the above that 0.5% above RPI is a bit stingey.

Sceptic001

JamesU wrote: »

Interesting read in the May 2011 Halifax report on housing costs, link below. Various inflationary house cost increases across the board over a 3yr period but mostly masked by the overall drop in mortgage interest payments.

BoE rates decreased from 5% to 0.5% between Sep 08 - Mar 09 onwards, with deflation between approx Oct/Nov 08 - Nov 09. But between Mar 2008 and Mar 2011 household mortgage interest payments are only 21.3% lower in the report (Table 1 in link).

If mortgage payments (not BoE rates) were to increase to pre-deflation levels (say Mar 08), they would therefore need to increase by 21.3%. But given the mortgage interest component in the RPI index is around 3.2% at present (see post #7 and link to ONS), a 21.3% increase in this component would only represent a %RPI increase of 0.68%??

If the 0.68% increase is in the right ballpark, that would suggest future increases in BoE rates will not lead to a significant increase in future RPI inflation due to increases in mortgage payments (even a sharp one month rise of 0.68% is not overly significant, and the effect of a phased increase over 12-24mths with gradual BoE rate rises is minimal).

Would be interested in views on this in case the calculations above are in error, or anything else that has been overlooked.

http://www.lloydsbankinggroup.com/media/pdfs/halifax/2011/Cost_of_housing_rises_to_three_year_high.pdf

JamesU

The Lloyds figure of -21.3% refers to the fall in total mortgage payments including capital repayments.

The ONS figures (a fall from 60 basis points to 32 basis points ie. -46.67%) relates to interest only, which is what the RPI takes account of.

So although a return to pre-2008 levels would increase the average mortgage payment by about 27% (21.3/78.7*100), the mortgage interest element would rise by a massive 87.5% (28/32*100), adding back to RPI the 2.8 percentage points lost in 2009.

JamesU

Sceptic001 wrote: »

The Lloyds figure of -21.3% refers to the fall in total mortgage payments including capital repayments.

The ONS figures (a fall from 60 basis points to 32 basis points ie. -46.67%) relates to interest only, which is what the RPI takes account of.

So although a return to pre-2008 levels would increase the average mortgage payment by about 27% (21.3/78.7*100), the mortgage interest element would rise by a massive 87.5% (28/32*100), adding back to RPI the 2.8 percentage points lost in 2009.

Had a think about this. Yes you are right, my oversight, cannot use Halifax 3yr mortgage interest payment data as it includes capital repayments aswell as interest.

But in the calculations shown, surely the 2008 6.0% and 2011 3.2% mortgage interest payment components cannot be compared to establish the shortfall/future RPI increase of 2.8/3.2*100 = 87.5% of present index (3.2% present, 2.8% future increase), as the 2008 and 2011 values are % weightings in the index and not absolute values. The % weighting of the mortgage interest component is varying in 2008 and 2011, but in each year so are all the other components in the RPI index and they effect the % weighting of the mortgage interest payment component in any given year. So not sure how a comparison between % weighting of mortgage interest payment in 2008 and 2011 can be valid? Need annual averaged absolute values?

JamesU

kar999

Interesting comments in the FT over the weekend regarding interest rate rises... It should make the impact of these certificates something to watch over the next 5 years,

Families should plan for interest rates to rise gradually over the next two years, the Bank of England’s chief economist signalled in an interview with the Financial Times.

http://www.ft.com/cms/s/0/f9f2e146-831c-11e0-85a4-00144feabdc0.html#axzz1NDX3HmVp

Thrugelmir

Masomnia wrote: »

So why would the Bank put rates up unless they expected high inflationary pressure in the next few years? Where's that going to come from with banks not lending and low demand in the economy due to cuts?

Imported inflation is the concern for the BOE. Energy prices will rise steeply later this year.