Inflation hits 3%

Generali

Seems funny that Gordy should blame rising inflation on a frothy housing market - I thought the whole point of the CPI was that it stripped out housing costs!

fivemice

I'm fed up of all the scaremongering now. My mum survived the last bust on her own bringing up me and my sister. It seems to be that if you buy a house now then you WILL lose it and you would be stupid to even try. My mum didn't lose her house, she just went without for a few years. I guess it depends on whether you'd rather have your own house with the security that comes with it, or the luxuries that will be forgotten in a couple of years time.

IMO you're only going to get into hot water if you didn't allow for interest rate rises, which would have been a tad silly given how low they are and that they have been averagely 8.8% over the last 30 years.

The fact is, nobody knows what will happen. This bust has been "just around the corner" for at least the last three years.

And lets face it, if this is the start of the bust, another boom must be "just around the corner" too

mystic_trev

fivemice wrote:

IMO you're only going to get into hot water if you didn't allow for interest rate rises, which would have been a tad silly given how low they are and that they have been averagely 8.8% over the last 30 years.

You're dead right fivemice, and your mother was obviously very Prudent during the last crash - Pity Gordon hasn't been the same! Unfortunately what happened in the last crash is exactly what you've mentioned, but it was a MINORITY of people who were effected. However it only needs a minority of people for a Crash to happen.

Regarding the Inflation figures - It's interesting to see the ONS introduce a caculator (for people to gauge their personal rate of inflation) on the same day as CPI / HPI figures. Now the "cats out of the bag" people will be expecting to have wage increases to match - and what do you get? Talk about trying to get Turkeys to vote for Christmas!

gil13

Nice comments, it is amazing what people can get through, although sometimes the belts have to be pulled very tight. The interest rate average over the last 30 years must also be seen in context, in that until the BOE became independent that Interest Rates were set by Chancellors, often for policital ends. I suspect that the current cycle will see furthr tightening perhaps another half and then it is very much down to sentiment and how people react. If people panic it could be a bit messy, which would effect the housing market and the stock market. It people stay calm and are sensible in wage demands and the like then we might just get away with it.

Generali

I agree in part with what you say - after all, for most of us the value of your house matters twice, the day you buy it and the day you sell it. The problem comes if a lot of people can't keep up with mortgage payments as interest rates rise.

If this happens it leads to a reduction in the amount of money banks can lend (especially if they go bust although this is pretty unlikely). This, in turn, leads to a reduction to the amount that companies can invest. That leads to a reduction in the demand for labour (jobs/overtime). That can cause a recession or depression - falling assets prices that had been borrowed against led in a similar way to this to the 1930s US depression according to JK Galbraith at least.

Alan_M_2

There are other ramifications of drops in value that are often overlooked particularly with regard to negative equity.

As long as you can make the relevant payments it seems it doesn't matter, but what the negative equity does is seriously effect your credit rating, so no finance, difficult to get credit cards, very difficult to remortgage if an when your fixed rate comes to an end.

If you happen to be a sole trader this is even worse as your business finances and personal finances are irrevocably connected, so this could also stop your business obtaining finance, leases, credit accounts, expansion funding etc.

Just be aware that it isn't as cut and dry as being able to hold on to a property, whilst equity in a property acts a positive buffer to your finances, negative equity has the opposite effect, on paper, you're in debt adn all the lender actually care about is what's on the paper.

Do what you think is right, but walk in with your eyes open.

cwcw

Maybe I'm being thick here, but inflation is caused by spiralling costs and the subsequent wage increase demands, yes? So if people are finding their electricity, gas bills, etc, are going up beyond their salary increases, they try to demand more money. How does forcing another cost up (mortgage repayments) have the opposite effect? Surely if everyone's mortgage payments spiral, they will demand salary increases to cover them too.

F_T_Buyer

cwcw wrote:

Maybe I'm being thick here, but inflation is caused by spiralling costs and the subsequent wage increase demands, yes? So if people are finding their electricity, gas bills, etc, are going up beyond their salary increases, they try to demand more money. How does forcing another cost up (mortgage repayments) have the opposite effect? Surely if everyone's mortgage payments spiral, they will demand salary increases to cover them too.

No. Inflation is caused by more money in the economy.

Take an example, if everyone became a millionaire what would it be like being a millionaire? The answer is exactly the same as it is now, because if everyone was a millionaire being a millionaire would mean nothing, you would need to be a billionaire instead.

The definition of inflation in economics is, and always has been, the decreasing value of money. If money devalues, what happens to prices? Prices stay still, but compared to the value of money they seem to be rising. The government, media, VIs have all tried to change this definition from devaluing money to rising prices.

Why have they done this? Two reasons (probably). Firstly, it is far easier for people to understand rising prices, and secondly (the biggy) is who measures prices to see if they are rising or not - the government. Now, what has happened under Gordon Brown is he changed the way prices are measured from the retail prices index to the consumer prices index, so this is now only measuring consumer inflation, and excludes things you need to spend money on.

Take a few adjustments last year for the CPI, orange juice was taken out and replaced by champagne, child car seats were removed, and small bread loafs were removed.

Why? Orange juice is up in price by 30-50%, yet champagne had no duty increase, so is static in price. Child car seats became law last year, so more people need to buy them, hence pushing up the cost. Bread is increasing in price rather rapidly.

Ok, i'm going off your original question. But increasing the money in the economy is inflation, and in the UK the amount of money in the economy has increased by around 14% during 2006.

Yes, 14%. Now you can see all the extra money chasing the same items as before, more money, same number of items means rising prices.

But the government has convinced the public inflation is near 2%, not 14%. And a increasing money supply makes people feel good, as their houses rise in value and more access to debt, so feel richer.

Now, this is now feeding through to general prices. Oil has risen 300%, and caused little inflation, but now's it's being blamed. The problem is you are noticing it, and you want to keep up your standard of living, so damand higher wages. This then causing more inflation, and we go back to what happened in the 70s.

What needs to happen is interest rates rise to slow this money growth to discourage borrowing, this over approx 2years effects end consumer prices. The problem now is, as your question, people don't see it like that. The BoE should have acted earlier, but 18months ago what were the BoE doing? CUTTING RATES.

The BoE are now panicking, as they have done little too late. The problem is it may have the reverse effect, as you immediately see your mortgage go up, so may demand more wages anyway. This is why I say the BoE have failed, and it was apparant back in Aug05 when the cut rates to stop the housing market falling.

They are other issues too, such as why would foreign investors hold sterling if inflation is higher the interest rates. So the BoE have to keep demand for the currency too.

It goes back to the age old problem, you see immediate rising costs (mortgages) but if you receive more wages, interest rates will have to go higher.