Why high inflation is good

germanjulian

Inflation is good for the UK debt mountain right and bad for you and me. The Gov. and Bank of England want high inflation, right?

http://en.wikipedia.org/wiki/Inflation#Effects

Debtors who have debts with a fixed nominal rate of interest will see a reduction in the "real" interest rate as the inflation rate rises. The real interest on a loan is the nominal rate minus the inflation rate (approximately [30] ). For example if you take a loan where the stated interest rate is 6% and the inflation rate is at 3%, the real interest rate that you are paying for the loan is 3%. It would also hold true that if you had a loan at a fixed interest rate of 6% and the inflation rate jumped to 20% you would have a real interest rate of -14%. Banks and other lenders adjust for this inflation risk either by including an inflation premium in the costs of lending the money by creating a higher initial stated interest rate or by setting the interest at a variable rate. As the rate of inflation decreases, this has the opposite (negative) effect on borrowers.

and
http://en.wikipedia.org/wiki/Stealth_tax#Inflation_as_stealth_taxation

purch

The Gov. and Bank of England want high inflation, right?

No.

Starting with an assumption and then using a Wikimadeupia link to back up the assumption is risable.

CLAPTON

of course the government and BoE don't actually want high inflation; it's just that's it's very convenient way of reducing the government debt relative to GDP.
obviously the fact that BoE has stopped worrying about inflation is purely co-incidental.

high inflation does, in the medium term help people with debts like mortgages and doesn't help people with savings

ILW

Therby people are tempted to reduce savings and increase debt, and in a few years the whole thing falls over again.

grizzly1911

CLAPTON wrote: »

of course the government and BoE don't actually want high inflation; it's just that's it's very convenient way of reducing the government debt relative to GDP.
obviously the fact that BoE has stopped worrying about inflation is purely co-incidental.

It is a simple solution when they can't really sort out the real issue.:eek:

Shame it screws those who thought they had got them sorted and nothing to do with the fiasco.:mad:

macaque_2

CLAPTON wrote: »

high inflation does, in the medium term help people with debts like mortgages and doesn't help people with savings

I don't agree. Income inflation helps people with mortgage debt as does house price inflation. Right now we have neither. Disposable incomes are falling as are house prices. When combined with commodity inflation, that adds up to a toxic brew for people with high mortgage debt.

Loughton_Monkey

Far too simplistic to rant about whether inflation is 'good' or 'bad'.

Depends far too much on all the other things. What if?????

- High inflation, but continued low base rate, hence low interest on savings?
- High inflation, but bank rate high, and we are all beating it on instant access accounts.
- High inflation, but high unemployment and downward pressure on wages.
- High inflation, but extremely cut-throat labour market with even higher wage inflation.
- High inflation, but still growing 10% a year (a la China)
- High inflation, but still growing miserably, and even then only by having more sandwich shops.

Please remember that the whole 'package' of metrics is what matters, and the relationship between them [GDP growth, Inflation, Wage inflation, unemployement, Exchange Rate, Interest Rates, Balance of Payments, Mortgage Rates, Industrial confidence, Productivity......]

Having said all that, given that the UK 'metrics' remain so dire - and will continue to do so - then inflating away the debt is the clear (and obvious) Government strategy.

CLAPTON

macaque wrote: »

I don't agree. Income inflation helps people with mortgage debt as does house price inflation. Right now we have neither. Disposable incomes are falling as are house prices. When combined with commodity inflation, that adds up to a toxic brew for people with high mortgage debt.

the key is the word 'medium ' as in medium term

so you are correct at this moment but wage inflation will inevitably follow unless of course there is nuclear war, pestilence, collapse of the world order, explosion of super volcatoes or other unforeseen events in which case the price of houses will cease to be a topic of conversation in wc1

grizzly1911

Inflation is bad for Janet & John IMO.

Yes it may bring wage inflation but that will result in job losses and we are always playing catch up.

The items we "have " to buy or consume are going up far higher than the headline rates and the items in the basket that moderate it are not essentials.

We rarely see deflation in staple commodities as by definition they are in constant demand and are raw product.

In reality the Government have very limited control over it. They have given up too many of the levers.

I even saw frozen white fish, caught in the Pacific and packaged in China, today in my local supermarket/ Happy to eat but....

CLAPTON

grizzly1911 wrote: »

Inflation is bad for Janet & John IMO.

Yes it may bring wage inflation but that will result in job losses and we are always playing catch up.

The items we "have " to buy or consume are going up far higher than the headline rates and the items in the basket that moderate it are not essentials.

We rarely see deflation in staple commodities as by definition they are in constant demand and are raw product.

In reality the Government have very limited control over it. They have given up too many of the levers.

I even saw frozen white fish, caught in the Pacific and packaged in China, today in my local supermarket/ Happy to eat but....

wage inflation brings massive benefits to people in debt (i.e. mortgages) as the percentage of their salary being spent on mortgage payments will fall.


I'm unaware of any correlation between high inflation and job losses as long as the exchange rate is free to adjust.

we have many times and often seen reductions in the price of stables as increases in productivity have increased the yield and so decreased the price