Inflation

TonyTeacake

[Deleted User] said:

If you listen to economists, the big debate at the moment is about whether inflation is being driven by temporary factors or whether this is the start of a consistent rise in inflation. In reality, there are quite a lot of reasons to think this is just temporary. See this from the LSE for example: https://blogs.lse.ac.uk/europpblog/2021/05/03/should-central-banks-be-worried-about-rising-inflation/ 

This inflation is no way temporary. I think we will have high inflation for most of this decade or maybe longer. The main tool for bringing inflation down is interest rates. The BOE have got all of their forecasts wrong and when they realise this inflation monster is going nowhere they just might  start to be more aggressive withrate hikes. Although this will cause a lot of pain especially in the housing market, it maybe the only choice, or they can do nothing and let inflation runaway and then we will have hyperinflation which will be disastrous.

Either way we can expect some real pain in the economy. 

RG2015

TonyTeacake said:

[Deleted User] said:

If you listen to economists, the big debate at the moment is about whether inflation is being driven by temporary factors or whether this is the start of a consistent rise in inflation. In reality, there are quite a lot of reasons to think this is just temporary. See this from the LSE for example: https://blogs.lse.ac.uk/europpblog/2021/05/03/should-central-banks-be-worried-about-rising-inflation/ 

This inflation is no way temporary. I think we will have high inflation for most of this decade or maybe longer. The main tool for bringing inflation down is interest rates. The BOE have got all of their forecasts wrong and when they realise this inflation monster is going nowhere they just might  start to be more aggressive withrate hikes. Although this will cause a lot of pain especially in the housing market, it maybe the only choice, or they can do nothing and let inflation runaway and then we will have hyperinflation which will be disastrous.

Either way we can expect some real pain in the economy. 

The post to which you refer is well over a year old.

I suspect the author may have a different view now.

masonic

The author is also unlikely to see the response as they have since deleted their forum account. There is nothing that can be done to interest rates that will make the price of fuel, energy, food etc come down, or reduce demand for them. The recent circumstances have created an opportunity to somewhat tighten economic policy so that there is somewhere to go when there is next pain in the economy. Part of an ever repeating cycle.

sevenhills

masonic said:

 There is nothing that can be done to interest rates that will make the price of fuel, energy, food etc come down, or reduce demand for them.

Interest rates make mortgages more expensive, so people have less money to spend.
It also dampens demand, so prices do not increase so much.

masonic

sevenhills said:

masonic said:

 There is nothing that can be done to interest rates that will make the price of fuel, energy, food etc come down, or reduce demand for them.

Interest rates make mortgages more expensive, so people have less money to spend.
It also dampens demand, so prices do not increase so much.

It won't dampen demand for the items I mentioned. People will have less money to spend, so many will struggle to survive, which is why the government is having to hand out money to help with the cost of living crisis. The rioting will start long before significant numbers of people choose to go without meals, heating or transportation.

Edit: I suppose it is worthy of mention that when coming from such low levels initially, increasing mortgage costs is going to be a driver of positive inflation in indexes that include housing costs, and it will have a long tail as people come to the end of fixed deals at different times, and the new costs work their way into rental prices.

Nebulous2

masonic said:

The author is also unlikely to see the response as they have since deleted their forum account. There is nothing that can be done to interest rates that will make the price of fuel, energy, food etc come down, or reduce demand for them. The recent circumstances have created an opportunity to somewhat tighten economic policy so that there is somewhere to go when there is next pain in the economy. Part of an ever repeating cycle.

Demand will drop as prices rise.... Economists talk about 'demand destruction' when the price of something goes up, or supply is limited.

There are signs of that happening for fuel already, as people are driving less. The media is also full of stories about people who cannot afford to heat their houses, or to heat their food, though how much that is yet feeding through into reduced consumption I don't know. 

It will however - as people simply wont be prepared or able to carry the increased costs. 

masonic

Nebulous2 said:

masonic said:

The author is also unlikely to see the response as they have since deleted their forum account. There is nothing that can be done to interest rates that will make the price of fuel, energy, food etc come down, or reduce demand for them. The recent circumstances have created an opportunity to somewhat tighten economic policy so that there is somewhere to go when there is next pain in the economy. Part of an ever repeating cycle.

Demand will drop as prices rise.... Economists talk about 'demand destruction' when the price of something goes up, or supply is limited.

There are signs of that happening for fuel already, as people are driving less. The media is also full of stories about people who cannot afford to heat their houses, or to heat their food, though how much that is yet feeding through into reduced consumption I don't know. 

It will however - as people simply wont be prepared or able to carry the increased costs. 

I'd be interested in any data that goes beyond anecdotes to show how much less food, fuel, and energy is being used. One of the problems with the current situation is the people who are really struggling now, were only just managing before, and so they were already operating on a low budget. I'm certainly not disputing that if demand comes down, prices would come down, but things are going to need to get really ugly for that to happen. If someone has the financial capability to pay double, or triple for their supermarket shop or tank of petrol, then it is very likely they will begrudgingly do so, especially those who are high earners and high spenders anyway. When a sufficient number of people get priced out of eating 3 meals a day, then there will be blood on the streets. Rationing would be needed before it got to that point.

Albermarle

masonic said:

Nebulous2 said:

masonic said:

The author is also unlikely to see the response as they have since deleted their forum account. There is nothing that can be done to interest rates that will make the price of fuel, energy, food etc come down, or reduce demand for them. The recent circumstances have created an opportunity to somewhat tighten economic policy so that there is somewhere to go when there is next pain in the economy. Part of an ever repeating cycle.

Demand will drop as prices rise.... Economists talk about 'demand destruction' when the price of something goes up, or supply is limited.

There are signs of that happening for fuel already, as people are driving less. The media is also full of stories about people who cannot afford to heat their houses, or to heat their food, though how much that is yet feeding through into reduced consumption I don't know. 

It will however - as people simply wont be prepared or able to carry the increased costs. 

I'd be interested in any data that goes beyond anecdotes to show how much less food, fuel, and energy is being used. One of the problems with the current situation is the people who are really struggling now, were only just managing before, and so they were already operating on a low budget. I'm certainly not disputing that if demand comes down, prices would come down, but things are going to need to get really ugly for that to happen. If someone has the financial capability to pay double, or triple for their supermarket shop or tank of petrol, then it is very likely they will begrudgingly do so, especially those who are high earners and high spenders anyway. When a sufficient number of people get priced out of eating 3 meals a day, then there will be blood on the streets. Rationing would be needed before it got to that point.

I can imagine though that demand in the part of the population that is not poor, but not well paid either, will come under pressure. Especially after the Summer/holiday season and when the actual fuel bills ramp up even more. The 'squeezed middle' as they were once known.

masonic

Albermarle said:

masonic said:

Nebulous2 said:

masonic said:

The author is also unlikely to see the response as they have since deleted their forum account. There is nothing that can be done to interest rates that will make the price of fuel, energy, food etc come down, or reduce demand for them. The recent circumstances have created an opportunity to somewhat tighten economic policy so that there is somewhere to go when there is next pain in the economy. Part of an ever repeating cycle.

Demand will drop as prices rise.... Economists talk about 'demand destruction' when the price of something goes up, or supply is limited.

There are signs of that happening for fuel already, as people are driving less. The media is also full of stories about people who cannot afford to heat their houses, or to heat their food, though how much that is yet feeding through into reduced consumption I don't know. 

It will however - as people simply wont be prepared or able to carry the increased costs. 

I'd be interested in any data that goes beyond anecdotes to show how much less food, fuel, and energy is being used. One of the problems with the current situation is the people who are really struggling now, were only just managing before, and so they were already operating on a low budget. I'm certainly not disputing that if demand comes down, prices would come down, but things are going to need to get really ugly for that to happen. If someone has the financial capability to pay double, or triple for their supermarket shop or tank of petrol, then it is very likely they will begrudgingly do so, especially those who are high earners and high spenders anyway. When a sufficient number of people get priced out of eating 3 meals a day, then there will be blood on the streets. Rationing would be needed before it got to that point.

I can imagine though that demand in the part of the population that is not poor, but not well paid either, will come under pressure. Especially after the Summer/holiday season and when the actual fuel bills ramp up even more. The 'squeezed middle' as they were once known.

This will come into the political calculation of how far people can be pushed. What they choose to forego will likely not be the items under price pressure, so we may see deflation in luxury items rather than an impact on essentials. This will go some way to explaining the rapid fall in share price of several manufacturers of discretionary goods and services.

london21

Interest rates next review is on Thursday and looks like another increase. A lot of people are been squeezed with the increasing costs.