Inflation and Exchange Rates

Alan_M_2

fc123 wrote: »

It's rubbish...have had it in my sector for 15 years. Only snag is that we had increased volumes.
Now, volumes down...stuck with low prices.

This I relate to, prices dropped and margins reduced in the hope that volumes increase.

In that case, the industry I'm in has been dealing with this spectre for some time.

Generally although a correction in property prices is never a rosy time but we've always picked up business where people are refurbishing existing rather than moving house.

My problem now is most of these refurbishments are at some point somewhere financed by mortgages.....(as I see it) there is a lack of money availability to Mr & Mrs Joe Public at the moment until the banks do whatever they've got to do to get a bit of confidence back (if someone could enlighten me on what this is I'd be delighted to know).

Banks make money by lending, it is their core business, so surely at some point after they've tightened the purse strings, cut back on the bonuses, laid off a few thousand Gordon Gecko's, they will, at some point, need to start lending money to make money........will someone tell them to get a bloody move on please!

Alan_M_2

Generali wrote: »

From a business point of view the experience of Japan seems to show that people will spend on disposable stuff. They won't hold off buying things that they're just not going to be interested in tomorrow. They will hold off buying houses, consumer goods etc.

Ahh right, this explains how the luxury goods market marches on seemingly without issue, well, relatively.

So deflation makes all the things that we historically see as assets actually into liabilities, albeit temporarily.

Well, right now that means I should be investing in Louis Vuitton Handbags and Jimmy Choo's instead of buying more containers of granite in

tradetime

Alan_M wrote: »

I read these posts with interest and being in business I feel I should understand much more of it. Sadly most of it goes way over my head, mostly because I'm unaware of many of the phrases and indices that are referred to.

Would you be so kind as to explain in laymans terms why the Euro is currently so strong yet the Dollar weak against sterling and what the underlying reasons for these are (if in fact it's possible to explain in laymans terms!) I import in both currencies, In US$ from India and Euros from most of the EU......the Euro along with the restriction on mortgages is hurting me, the Dollar is helping right now. I'll be in a position to buy a reasonable amount of stock in August (in us$) , what I'm trying to decide is do I fill my boots in August in case the pound gives back some ground vs the US$, or do I stagger the orders. Ok it's difficult I know but if I understood what's moved the rates so far it might help me make a more informed decision. As these are 6 figure transactions, the rate does have quite a bearing in monetary terms.

Any information that can help me make decisions on the future of my own business are helpful, but quite often I get lost in the explanation.

Take above example on fuel duty, I've read that three times and can't get my head around the following statement "That means the pound would have to double in value against the dollar to halve the sterling price." Ok it may be late, and I may not be firing on all cylinders...but I'm reading it and it's not registering....:)

Unfortunately like most things currency movements are a result of many factors and interactions and thus it is very hard to pin down with a great deal of certainty why a currency is doing what it is doing and when it will stop, otherwise making money currency trading would become much easier.

That said in some part the US $ weakness has probably stemmed to some degree from the expectation of the US economic slowdown, since the FOMC's primary mandate, unlike the BOE and ECB is to stimulate the economy it was widely expected that the FOMC would cut interest rates aggresively, which proved to be correct. In general cutting rates is not supportive to a currency, this has likely been further exacerbated by the deepening slump in the US housing market, and the belief that it would lead the US into recession despite the FOMC's best efforts. More recently the FOMC has signaled an end to it's interest easing cycle which has led to a $ bounce, however the economy still likely remains a risk to the $ going forward.

The ECB's primary mandate on the other hand is price stability, or in other words, fight inflation, thus against the backdrop of high inflation the ECB offered relativesurety that they would not cut rates, Trichet has not disappointed and has stuck to the task doggedly, only stopping short of raising rates, thus the Euro has been rewarded. The ECB's stance has not been without cost though as manyof the weaker Euro nations economies have suffered, but Germany which is Europes largest economy has to date weathered the storm.
UK Plc has adopted the idea that the inflationary pressures are temporary, and with a weakening economy and a housing market in trouble has cut rates,though less aggressively than the US, it's currency thus has held up better against the $ but suffered to the Euro.
The current threat by the ECB is that they may raise rates, this would likely lead to continued strength in the Euro, as long as the economy does not show a concerted weakness. That's my very vague take on it, but it'squite a bit more complicated than that.

nightwatchman

Generali wrote: »

My points are 2:

1. Things aren't as bad as all that regarding inflation (eg it was much higher from 68-83).
2. That increasing the exchange rate to fight the current inflation isn't going to work.

What about heavier taxes on imported goods? Wouldn’t that control inflation ?

tradetime

nightwatchman wrote: »

What about heavier taxes on imported goods? Wouldn’t that control inflation ?

That would likely spark a tit for tat trade war with countries whose products you taxed.

nightwatchman

tradetime wrote: »

That would likely spark a tit for tat trade war with countries whose products you taxed.

Hmm ok. However we export hardly anything. We may end better off.

IveSeenTheLight

Getting paid in the UK but living abroad, I see at close hand the effect of the exchange rate.
Right now in effect my wage is worth 10% less today than it was last year. Add to this inflationary costs (diesel went up 70% and petrol 40% and I'm driving a diesel car at the moment ) and I'll be looking for much more than the 2% that Mr Darling wants everyone to get

Generali

nightwatchman wrote: »

What about heavier taxes on imported goods? Wouldn’t that control inflation ?

No as we import things that either can't be produced here or can be produced better, cheaper or both abroad. If we increase the price of imports we increase prices and thus inflation.

Alan_M wrote: »

Ahh right, this explains how the luxury goods market marches on seemingly without issue, well, relatively.

So deflation makes all the things that we historically see as assets actually into liabilities, albeit temporarily.

Well, right now that means I should be investing in Louis Vuitton Handbags and Jimmy Choo's instead of buying more containers of granite in

The problem with deflation for debtors is that it reduces the value of the asset while the size of the debt remains the same. It also tends to reduce the nominal income available to service the debt.

Obviously for people holding cash the opposite is true. The value of their cash becomes greater even if it's just stuffed under the matress. That creates its own problems as why take the risk of investing money in something that's going to be productive, provide employment, increase wealth and (hopefully) turn a tidy profit when all you need do is stick the money on deposit and you can make money.

confused31_2

im due a 3.5% pay rise in November or whatever inflation is whatever is the highest we will be getting what is the current inflation rate?

And where can i see if it goes up or down?

confused

tradetime

confused31 wrote: »

im due a 3.5% pay rise in November or whatever inflation is whatever is the highest we will be getting what is the current inflation rate?

And where can i see if it goes up or down?

confused

Office for National Statistics