Deflation - Inflation - Hyper Inflation & Interest Rates Questions?

bery_451

Hello,

Central Banks monetary policy is to meet inflation rate of lets say 2-3% set by Government fiscal policy right?

Why governments want prices of all the goods and services we pay for to be increased 2-3% yearly in a compounding way?

Why cant inflation be at 0% where prices of goods/services are stable constant throughout time? For this to happen central banks got to stop printing money right?


What is deflation, is it below the above mentioned target rate of 2-3% or below 0% inflation? Is there such thing as negative inflation or is just known as deflation?


Central banks get their statistics/prices of good/services data from past data history right in like a price index of what we pay for stuff to see how high inflation is now? How is this consumer price index is weighted?

The question is do the central banks get this data from essential good/services like food, drink, energy, healthcare, education that we need to survive on or from non essential good/services like holidays, tv's, phones, blenders, PlayStations, cars etc.?

Most non essential goods are from china which is cheap anyway so do central banks derive their current inflation figures from this non essential data that gives a false low below target inflation reading?

Lets look at the essential food items that everybody buys to survive on like bread/milk/eggs etc., since the 2008 crash has these prices steadily gone up to all time high prices now? If that is the case then we can rule out and say there's no deflation right?

Central banks have been printing so much money this year so how do they claim current inflation is below target? Doesn't make any sense.

Okay questions on interest rates:

- Looking at past charts high inflation is correlated high interest rates? Central banks say high interest rates are a sign of a good economy however why is there high inflation in a good economy when central banks don't print a lot of money in this correlated times? In this time there's less debt, savers get rewarded so what causes high inflation to make prices to sky high in this correlated time?

- Central banks say low interest rates are signs of a bad economy and they lower interest rates to get everybody borrowing cheap money at low rates to buy things that suppose to stimulate the economy higher so how this low interest rates is correlated to low inflation rates were having now when central banks are printing a lot of money in this correlated times? In this time theres more debt, debtors get rewarded so what causes low inflation to stop prices going sky high in this correlated time?

- Will low interest rates cause real estate property prices to continue going higher because it attracts a lot of buyers to cheap mortgages at low rates that increases demand pushing prices up and vice versa when interest rates rise? Real estate was cheap back in the 80's 90's but interest rates were high back then at like 15-19% not like 2-3% were getting today.

- If interest rates go negative then that means the borrower gets paid interest right?

- Is it possible to get times that makes economic sense where there is high interest & low inflation correlated and also low interest & high inflation correlated or does it always has to be not making sense that is high interest=high inflation and also low interest = low inflation cycles that we always go through?

Another_Saver

Slight inflation means there's always a lil more demand then supply, which prevents capital being wasted where there is insufficient demand. It is preferable to deflation - prices going down - which is incredibly destabilising as it is incentives deferring the buy side of any economic activity (consumption and investment).
Aside from the government, it is extremely unlikely that consumers will have access to negative interest rates.
If people buy things from China, they buy things from China. Therefore those purchases should be weighted in a consumer price index.
They relationship between money supply, prices and interest rates is never absolute, it is a theory. No economic theory is always relevant, it's the worst science there isn't.
The high interest rates and inflation of the 70s and 80s is explained by the Baby Boomers moving into the work force, consuming like no generation before and demanding credit, with a lower money supply from savers (less old people). These days, Boomers are retiring, their savings are adding to the money supply, and there are relatively less younger people demanding credit and consuming. Also post-war the gov built a **** ton of houses for the Boomers, which has never been repeated.
Hence there's lots of cheap money without the hyperinflation.
As the Boomers retire we'll see the labour supply shrink relative to the total population, the capital supply probably shrink forcing interest back to "normal" and wage inflation above price inflation, which may be the same or higher depending on retiring boomers spending habits.

The_Earl_of_Streatham

High inflation in the seventies had nothing to do with boomers; they seem to get blamed for everything, they're blamed for drawing pensions at present and in this account they're blamed for working for a living in the seventies.

High inflation in the seventies was a result of Anthony Barber (Edward Heath's Chancellor) pumping money into a flagging economy. In his 1971 budget he reduced taxes and set out a long-term reordering of the tax system (which gave us VAT instead of purchase tax). He also liberalised banking (which gave us Slater-Walker and the secondary banking crisis) enabling banks to lend more freely. Bank lending went from £71m to more than a billion (but it should be remembered that lending to individuals was still tightly controlled; a banks loan book belonged to the bank and you were required to show that you had 10% of any purchase in cash) , government borrowing as measured by money supply soared, rising as much as 25% in a year. Inflation as a consequence was running at about 10%. This was to some extent manageable and a genuine boost to the economy.

Then came the Yom-Kippur war of 1973 and energy prices quadrupled overnight (our own oil boom was ten years away). Inflation hit a peak in the upper twenties a couple of years later.

Linton

1) CPI is calculated on how the average family spends its money.  Some things have gone up in price and some things have gone down.  Many things have stayed much the same in price though their quality and functionality has increased greatly. These days most people dont spend a high % of their money on basic foodstuffs and other necessities.

2) A major reason for inflation is when people have more money to spend than required for the goods available.  If we look at the past year, the money the government has released has not added to the wealth of the general population. Paying for furlough doesnt increase the amount of money in crculation, it just partially replaces the money that is not being paid by employers. Since people are a poorer than previously and the opportunities to spend are more limited manufacturers and shops dont want to risk losing customers by increasing prices. Hence minimal inflation.

Also many employers are running on a reduced labour force who are putting in more effort or working more efficiently, so their costs are lower.

Whenever you hear about "printing money" leading to inflation you need to be sure there is a mechanism whereby that money leads to the increase in wealth of the general public.

3) Low interest rates are not a sign of a "bad" economy and high interest rates are not a sign of a "good" economy.  Interest rates are used by Governments to control the economy.  When the economy is depressed with the risk of deflation interest rates are reduced so that people are encouraged to spend rather than save.  When there is inflation interest rates are increased to reduce the amount of money in circulation by discouraging borrowing.  However these days with the global market, the ability of the government to change interest rates is rather limited - if loans are too expensive in the UK large companies can get them from elsewhere.

4) Negative interest rates really only apply to safe bonds issued by the government.  They occur when the market price of the bond exceeds the total return - ie anyone buying the bond will make a loss by the time the bond reaches maturity.  At first sight one wonders why anyone would buy a bond with a guaranteed long term loss.  The reason is that safe bonds are a very good way to hold large amounts of easy aceess cash which would incur high charges if placed in a bank.  Why would a bank wnat £Ms in cash which could be withdrawn any time?

Govvernment bonds can only have negative interest rates because they are, as near as makes no difference, 100% guaranteed.  If there is any risk at all interest must be charged.

For the general public inegative interest rates could have the effect of banks removing high interest accounts and possibly implementing charges for current accounts.  Free banking and high interest accounts represent a loss for the banks.  They provide it because they need a customer base to whom they can sell other products.  Perhaps it's cheaper and more effective than advertising.

ElephantBoy57

bery_451 said:

Central Banks monetary policy is to meet inflation rate of lets say 2-3% set by Government fiscal policy right?
Why governments want prices of all the goods and services we pay for to be increased 2-3% yearly in a compounding way?

Uk Governments target is 2%, if the target was zero they could miss their target and end up in negative rates.

I want my house and stock market share to increase value to increase, not decrease.

Linton

Another_Saver said:

........
The high interest rates and inflation of the 70s and 80s is explained by the Baby Boomers moving into the work force, consuming like no generation before and demanding credit, with a lower money supply from savers (less old people). These days, Boomers are retiring, their savings are adding to the money supply, and there are relatively less younger people demanding credit and consuming. Also post-war the gov built a **** ton of houses for the Boomers, which has never been repeated.
Hence there's lots of cheap money without the hyperinflation.
As the Boomers retire we'll see the labour supply shrink relative to the total population, the capital supply probably shrink forcing interest back to "normal" and wage inflation above price inflation, which may be the same or higher depending on retiring boomers spending habits.

Some misunderstandings here...
1) The government did not build a vast number of houses for the Boomers, they were built for the pre-Boomer generation.  After the end of the war housing was in extremely short supply thanks to the bomb damage in the cities.  Also the city housing that survived was frequently in appaling condition with every major city havings its "slums".  Many people were living in prefabs and others in overcrowded HMOs. So the post war Labour government and subsequent Conservative governmentrs spent a lot of tax payers money rebuilding the cities.  Elections were fought on how many million houses would be built.  At the time of those elections the Boomers were too young to vote.

By the 1970s when Boomers were beginning to buy houses the work was mainly completed.  Then Thatchers started selling off the council estates.

2) Real estate was not cheap in the '80s/'90s in comparison with with the general wealth of the population.  It has always been and always will be at the limits of affordability.  The reason is that is what people are prepared to pay.

The difference that became significant at that time was that with the cutback in state provision everyone expected to be able to buy a house.  Previously many people expected to spend their whole lives paying rent. It was only around 1970 that the % of owner occupation exceeded 50%.

3) the high interest rates etc in the 1970s and 80s wasnt due to the boomers moving into work.  After all the very oldest boomer would not have entered work until 1971. 

Another_Saver

The_Earl_of_Streatham said:

High inflation in the seventies had nothing to do with boomers; they seem to get blamed for everything, they're blamed for drawing pensions at present and in this account they're blamed for working for a living in the seventies.

High inflation in the seventies was a result of Anthony Barber (Edward Heath's Chancellor) pumping money into a flagging economy. In his 1971 budget he reduced taxes and set out a long-term reordering of the tax system (which gave us VAT instead of purchase tax). He also liberalised banking (which gave us Slater-Walker and the secondary banking crisis) enabling banks to lend more freely. Bank lending went from £71m to more than a billion (but it should be remembered that lending to individuals was still tightly controlled; a banks loan book belonged to the bank and you were required to show that you had 10% of any purchase in cash) , government borrowing as measured by money supply soared, rising as much as 25% in a year. Inflation as a consequence was running at about 10%. This was to some extent manageable and a genuine boost to the economy.

Then came the Yom-Kippur war of 1973 and energy prices quadrupled overnight (our own oil boom was ten years away). Inflation hit a peak in the upper twenties a couple of years later.

It did: https://youtu.be/ZuXzvjBYW8A, great demographic reversal
The oil and political situation helped but the core driver of it that kept it going for so long can have only been demographics.

Another_Saver

Linton said:

Another_Saver said:

........
The high interest rates and inflation of the 70s and 80s is explained by the Baby Boomers moving into the work force, consuming like no generation before and demanding credit, with a lower money supply from savers (less old people). These days, Boomers are retiring, their savings are adding to the money supply, and there are relatively less younger people demanding credit and consuming. Also post-war the gov built a **** ton of houses for the Boomers, which has never been repeated.
Hence there's lots of cheap money without the hyperinflation.
As the Boomers retire we'll see the labour supply shrink relative to the total population, the capital supply probably shrink forcing interest back to "normal" and wage inflation above price inflation, which may be the same or higher depending on retiring boomers spending habits.

Some misunderstandings here...
1) The government did not build a vast number of houses for the Boomers, they were built for the pre-Boomer generation.  After the end of the war housing was in extremely short supply thanks to the bomb damage in the cities.  Also the city housing that survived was frequently in appaling condition with every major city havings its "slums".  Many people were living in prefabs and others in overcrowded HMOs. So the post war Labour government and subsequent Conservative governmentrs spent a lot of tax payers money rebuilding the cities.  Elections were fought on how many million houses would be built.  At the time of those elections the Boomers were too young to vote.

By the 1970s when Boomers were beginning to buy houses the work was mainly completed.  Then Thatchers started selling off the council estates.

2) Real estate was not cheap in the '80s/'90s in comparison with with the general wealth of the population.  It has always been and always will be at the limits of affordability.  The reason is that is what people are prepared to pay.

The difference that became significant at that time was that with the cutback in state provision everyone expected to be able to buy a house.  Previously many people expected to spend their whole lives paying rent. It was only around 1970 that the % of owner occupation exceeded 50%.

3) the high interest rates etc in the 1970s and 80s wasnt due to the boomers moving into work.  After all the very oldest boomer would not have entered work until 1971. 

1. The housing supply was there for the Boomers.
2. Real estate was much cheaper compared to average earnings.
3. If you take the full 1946-1975 spike and boom, boomers started moving into work - moving out, making babies, demanding housing and consumption and credit from say their early 20s, around 1970. The 60s boomers moving through adult life can be seen as a tapering off of these effects through the 90s and 2000s as housing becomes in unaffordable for the next generations down, the cost of capital shrinks to bubble valuations and interest rates fall to close to 0. That bulge of younger voting age people also partly explains Labour's dominance from 1997-2010.
this, with no additional capital supply is what made capital so expensive, and kept UK stocks and housing cheap and interest rates high for so long through the 70s and 80s.

itwasntme001

Another_Saver said:

Linton said:

Another_Saver said:

........
The high interest rates and inflation of the 70s and 80s is explained by the Baby Boomers moving into the work force, consuming like no generation before and demanding credit, with a lower money supply from savers (less old people). These days, Boomers are retiring, their savings are adding to the money supply, and there are relatively less younger people demanding credit and consuming. Also post-war the gov built a **** ton of houses for the Boomers, which has never been repeated.
Hence there's lots of cheap money without the hyperinflation.
As the Boomers retire we'll see the labour supply shrink relative to the total population, the capital supply probably shrink forcing interest back to "normal" and wage inflation above price inflation, which may be the same or higher depending on retiring boomers spending habits.

Some misunderstandings here...
1) The government did not build a vast number of houses for the Boomers, they were built for the pre-Boomer generation.  After the end of the war housing was in extremely short supply thanks to the bomb damage in the cities.  Also the city housing that survived was frequently in appaling condition with every major city havings its "slums".  Many people were living in prefabs and others in overcrowded HMOs. So the post war Labour government and subsequent Conservative governmentrs spent a lot of tax payers money rebuilding the cities.  Elections were fought on how many million houses would be built.  At the time of those elections the Boomers were too young to vote.

By the 1970s when Boomers were beginning to buy houses the work was mainly completed.  Then Thatchers started selling off the council estates.

2) Real estate was not cheap in the '80s/'90s in comparison with with the general wealth of the population.  It has always been and always will be at the limits of affordability.  The reason is that is what people are prepared to pay.

The difference that became significant at that time was that with the cutback in state provision everyone expected to be able to buy a house.  Previously many people expected to spend their whole lives paying rent. It was only around 1970 that the % of owner occupation exceeded 50%.

3) the high interest rates etc in the 1970s and 80s wasnt due to the boomers moving into work.  After all the very oldest boomer would not have entered work until 1971. 

1. The housing supply was there for the Boomers.
2. Real estate was much cheaper compared to average earnings.
3. If you take the full 1946-1975 spike and boom, boomers started moving into work - moving out, making babies, demanding housing and consumption and credit from say their early 20s, around 1970. The 60s boomers moving through adult life can be seen as a tapering off of these effects through the 90s and 2000s as housing becomes in unaffordable for the next generations down, the cost of capital shrinks to bubble valuations and interest rates fall to close to 0. That bulge of younger voting age people also partly explains Labour's dominance from 1997-2010.
this, with no additional capital supply is what made capital so expensive, and kept UK stocks and housing cheap and interest rates high for so long through the 70s and 80s.

This explains it very well.  I should add that the boomers in their prime working ages in the 70s were not particularly sensitive to interest rates and debt levels (as are all young people usually since they have decades of earning power to pay debts off).  This further supported demand massively.

A further more controversial argument I should also make (if i may) is that it was the hiking of interest rates (at least initially), that was thought to control inflation, in fact made things worse.  Because as you raise interest rates (i.e. the cost of capital), businesses are less likely to pursue projects to add to productivity as, for obvious reasons, the hurdle rate to deem a project worthwhile had been harder to achieve.  Thus, whilst there was a lot of demand from the boomers, there was not enough supply of goods to meet this demand and thus inflation ensued.  This is also one of the reasons why Japan started booming and went into a bubble as, due to their lower cost of capital (not only just due to interest rates but the BOJ/ministers were ACTIVELY trying to loosen lending standards!!!), suddenly they saw huge incentives to supply goods (e.g. cars) to the western world due to the boomer demand.

Perhaps it was even higher rates in the west (close to 20% where they peaked) which were at levels that could finally restrain demand (because boomers became more worried about paying debts) and thus control inflation.

It is a very interesting world we live in and very fascinating when you study economics and financial markets with an open mind.

JezR

The problem with 'generation' definitions and their relations to birth rates and days is that they originate from the USA experience which was rather different in immediate post war period. They had a pretty sustained rate post war into the early 1960s, falling off in the early to md 1960s to a minimum in the mid 1970s and it has pretty much bounced around the same kind of level since. The UK had a large peak in 1947, but the rate fell off pretty sharpish thereafter back to similar levels of the 1930s before rising through the late 1950s peaking again in the middle 1960s. The decline was similar reaching a bottom by the late 1970s, but there have been two peaks since much lower than the boom as kind of echos, although there is a downward overlying trend as well.

Linton

All this talk about Boomers did this and did that apparently in a centrally coordinated way to do down another generation some 40 or 50 years later is totally counter productive and in many cases simply wrong.  We in the 1960s/70s had our own problems and for many life was much harder than it is for most now.  People generally behave fairly rationally in their own interests in the situation they find themselves.  No different now to then.  What is different now is when people moan they have the benefit of the megaphones and reverberation of the social media.