Stagflation and the BoE rate setting vote

michaels

'In economics, stagflation, a portmanteau of stagnation and inflation, is a situation in which the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high. It raises a dilemma for economic policy, since actions designed to lower inflation may exacerbate unemployment, and vice versa.'

So imho all the recent economic indicaters (Q1 GDP, house prices and transactions, retail sales, political uncertainty etc) have all been pointing to a slow down in the economy.

And yet the BoE rate setting committe just voted only 5-3 against a rate rise. Either they are behind the curve or they see something coming in terms of the current inflation resulting from the GBP devaluation becoming entrenched.

Prevoiously in 2012/13 the BoE did not respond to an increase in inflation to over 5% on the grounds that it was a one off change in the price level rather than an inflaitonary process and this was evidenced by there being no tightness in the labour market leading to increased wages.

Perhaps they are now anticipating just such a labour market tightening as a result of Brexit - after all even though there have as yet been no changes to FOM the latest net migration figures and the nurses recruitment figures show that not only has new EU migration fallen off a cliff but also that exsting migrants have 'gone home'.

The only problem is that current wage data does not show any such supply constraint pushing up incomes, to the contary wages increases are continuing to moderate - hence the title of this post - Stagflation!

Thrugelmir

Increases in the cost of computer games and overseas holidays accounted for much of the increase. Given neither are highly beneficial to the UK economy. No need to panic yet.

Poor exchange rate may have something to with the attraction of working here. Public sector workers in Eire are getting a 6% rise over the next 3 years. Adding to the attraction of staying put.

mattcanary

ilovehouses wrote: »

People's holidays and computer games are increasing in price. It's annoying when things you want to buy increase in price. They'd be even more annoyed to see you just stuck two fingers up at them because of strange notion that people's happiness matters less depending where they spend their money.

They are trifling concerns, compared to the bigger picture.

buglawton

1. Govt ramps up public spending due to political pressure
2. Govt prints a lot more money to cover the gap between tax receipts and spending
3. Inflation leaps
4. Everyone unable to extract a substantial pay rise from their employer is now facing a de facto pay cut. You can't make a constructive dismissal case out of pay cuts due to inflation!
5. BOE reacts by increasing base rate, mortgages up
6. The de facto pay cut (for everyone except those labour monopolies that can wield union power) causes a collapse of discretionary spending
7. General collapse of the UK economy

buglawton

During the inflation surges of the 70s and 80s employers were quick to offer pay rises to keep up. This time around I don't see it. Perhaps due to global labour competition - insourcing via immigration and outsourcing by multinationals.

So this time around I see any govt policy to devalue our pay packets as especially corrosive.

Thrugelmir

buglawton wrote: »

During the inflation surges of the 70s and 80s employers were quick to offer pay rises to keep up.

Technology was increasing productivity though at the time. Mainframe computers, then the PC. Japanese programmable machine tools were arriving. Remember watching a machine make a torpedo warhead from a cube of metal. Far removed from being hand lathed. Tolerances were far more accurate too.

sevenhills

buglawton wrote: »

During the inflation surges of the 70s and 80s employers were quick to offer pay rises to keep up. This time around I don't see it. Perhaps due to global labour competition - insourcing via immigration and outsourcing by multinationals.

So this time around I see any govt policy to devalue our pay packets as especially corrosive.

Unions were much stronger, now its the directors getting the big pay rises, not the workers.

buglawton

Thrugelmir wrote: »

Technology was increasing productivity though at the time. Mainframe computers, then the PC. Japanese programmable machine tools were arriving. Remember watching a machine make a torpedo warhead from a cube of metal. Far removed from being hand lathed. Tolerances were far more accurate too.

True enough, but those technologies were relatively expensive. Today chips and sensors are so cheap, I believe we're going through another productivity revolution. Whatever you say, pumping more money into the system than tax receipts justify, so leading to devaluation of 'the pound in your pocket' is plain dishonest and will never get my vote.

BobQ

michaels wrote: »

'In economics, stagflation, a portmanteau of stagnation and inflation, is a situation in which the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high. It raises a dilemma for economic policy, since actions designed to lower inflation may exacerbate unemployment, and vice versa.'

So imho all the recent economic indicaters (Q1 GDP, house prices and transactions, retail sales, political uncertainty etc) have all been pointing to a slow down in the economy.

And yet the BoE rate setting committe just voted only 5-3 against a rate rise. Either they are behind the curve or they see something coming in terms of the current inflation resulting from the GBP devaluation becoming entrenched.

Prevoiously in 2012/13 the BoE did not respond to an increase in inflation to over 5% on the grounds that it was a one off change in the price level rather than an inflaitonary process and this was evidenced by there being no tightness in the labour market leading to increased wages.

Perhaps they are now anticipating just such a labour market tightening as a result of Brexit - after all even though there have as yet been no changes to FOM the latest net migration figures and the nurses recruitment figures show that not only has new EU migration fallen off a cliff but also that exsting migrants have 'gone home'.

The only problem is that current wage data does not show any such supply constraint pushing up incomes, to the contary wages increases are continuing to moderate - hence the title of this post - Stagflation!

Interesting but I am not sure what you think should be done.

My view is that we were doing fine until we voted for Brexit. Now we have industry accustomed to a low wage low productivity economy which is incapable of responding to a self-induced labour shortage. Inflation is taking hold, because of the falling pound. Whether raising interest rates would help or hinder who knows.

The real solution is to retain EU membership but the nation has decided otherwise. Brexit not in the interest of business as they well know, and its not going to help the young or the poor. But the nation in their wisdom have decided otherwise. We must now look forward to another decade of austerity, low wages, and income and wealth inequality with insufficient money available for investing in infrastructure or skills development.

Some of us will do very nicely. The irony is that those who voted for Brexit in the main will suffer.

michaels

But if wage increases continue low then once the impact of the devaluation has worked through the system inflation will fall back to the level of wage increases or below without any increase in interest rates being needed.

So what exactly is it that (some of) the MPC are worried about?

BobQ

Even if the pound stays the same and inflation works through, people will still feel poorer because the cost of goods will be higher even if inflation declines

If we do not secure a favourable Brexit we will also get inflation from the costs of doing business with the EU (all those customs regulations) and if its unfavourable there will be more costs from tariffs.

I suspect they are worried about the inceasing uncertainty we are experiencing.