Blame use of CPI for low interest rates

Legacy_user

I read that we switched from using RPI to CPI in 2003, and that RPI considers mortgage /rent payments wheras CPI doesn't. RPI therefore might not necessarily decrease when interest rates are raised, so when RPI was historically high (and interest rates started from a previous high base) we would've had to raise rates much higher to bite the part of inflation that wasn't caused by housing

As well as that, RPI, always being higher, would've prompted higher rates anyway
RPI was wild, so rates were too

So now we're using CPI, so we don't need high rates, and it'll respond more to interest rate rises, so I think rates will stay low

Not only that, but rate rises would be stymied right now by mortgage debt and to keep gilt yields down

Thrugelmir

BOE publishes a quarterly report. Last one in May. Worth a read.

https://www.bankofengland.co.uk/-/media/boe/files/inflation-report/2018/may/inflation-report-may-2018.pdf?la=en&hash=50C30B6F32DE7CB3232EA2F0A025D849EEC1EBAA

antrobus

MatthewAinsworth wrote: »

I read that we switched from using RPI to CPI in 2003, and that RPI considers mortgage /rent payments wheras CPI doesn't. RPI therefore might not necessarily decrease when interest rates are raised, so when RPI was historically high (and interest rates started from a previous high base) we would've had to raise rates much higher to bite the part of inflation that wasn't caused by housing

As well as that, RPI, always being higher, would've prompted higher rates anyway
RPI was wild, so rates were too

So now we're using CPI, so we don't need high rates, and it'll respond more to interest rate rises, so I think rates will stay low

Not only that, but rate rises would be stymied right now by mortgage debt and to keep gilt yields down

The preferred measure of consumer inflation is CPIH which does include owner-occupier housing costs.

RPI is far more relevant for gilt yields, because a good chunk of the book is index linked to RPI. Despite the fact that RPI has always been a rubbish measure of inflation.

System

Thanks both, although I'm this report I can't find mention on cpih, although what I read cpih became in acceptable 2017, so before 2003 rpi ruled, causing higher rates? Then CPI ruled up till recently and now cpih might change things but it's too early to know, but I imagine it'll generally be somewhere between

System

Essentially the switch to CPI could explain the root of the differences between baby boomers and millenials (ie interest rates)

masonic

MatthewAinsworth wrote: »

Thanks both, although I'm this report I can't find mention on cpih, although what I read cpih became in acceptable 2017, so before 2003 rpi ruled, causing higher rates? Then CPI ruled up till recently and now cpih might change things but it's too early to know, but I imagine it'll generally be somewhere between

If your theory was correct, rates would have fallen after 2003, but actually they increased:
https://www.bankofengland.co.uk/boeapps/iadb/Repo.asp

It wasn't until 2008/9 that they plummeted to current levels. I wonder if anything happened around that time that could explain it?

System

MatthewAinsworth wrote: »

Essentially the switch to CPI could explain the root of the differences between baby boomers and millenials (ie interest rates)

Your argument is utter nonsense.

System

How come, economic?

dunstonh

MatthewAinsworth wrote: »

Essentially the switch to CPI could explain the root of the differences between baby boomers and millenials (ie interest rates)

You could list hundreds or thousands of economic changes that have taken place between those generations. Each having a pull or
push on the economic situation of the UK.

The change of RPI/CPI is not one that would be high up on that list.

Some things are the fault of the baby boomers.
Some things are the fault of the millennials.
Some things are the fault of hundreds of years of activity catching up with the later generations.
Some things are totally out of the control of anyone in the UK.

Zanderman

MatthewAinsworth wrote: »

Essentially the switch to CPI could explain the root of the differences between baby boomers and millenials (ie interest rates)

If was really that simple I think you'd find that every financial journalist would have covered the story many many many times by now.

System

Zanderman - they've said many times how rates were high then and low now, that's something the public understands and it's why house prices have risen - but the public don't understand rpi/cpI, however suddenly using a different calibration to measure it will lead to different behaviour

Masonic - rates can need to rise for cpi for non housing reasons but it lacks the same force that RPI would've had (as mortgage costs would rise with rates)
Comparing cpi to cpih will be interesting