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  • FIRST POST
    • MatthewAinsworth
    • By MatthewAinsworth 4th Jul 18, 10:05 PM
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    MatthewAinsworth
    Blame use of CPI for low interest rates
    • #1
    • 4th Jul 18, 10:05 PM
    Blame use of CPI for low interest rates 4th Jul 18 at 10:05 PM
    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
Page 1
    • Thrugelmir
    • By Thrugelmir 4th Jul 18, 10:27 PM
    • 59,791 Posts
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    Thrugelmir
    • #2
    • 4th Jul 18, 10:27 PM
    • #2
    • 4th Jul 18, 10:27 PM
    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=50C30B6F32DE7CB3232EA2F0A025D8 49EEC1EBAA
    Financial disasters happen when the last person who can remember what went wrong last time has left the building.
    • antrobus
    • By antrobus 4th Jul 18, 10:56 PM
    • 16,024 Posts
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    antrobus
    • #3
    • 4th Jul 18, 10:56 PM
    • #3
    • 4th Jul 18, 10:56 PM
    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
    Originally posted by MatthewAinsworth
    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.
    • MatthewAinsworth
    • By MatthewAinsworth 5th Jul 18, 6:29 AM
    • 3,105 Posts
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    MatthewAinsworth
    • #4
    • 5th Jul 18, 6:29 AM
    • #4
    • 5th Jul 18, 6:29 AM
    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
    • MatthewAinsworth
    • By MatthewAinsworth 5th Jul 18, 6:45 AM
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    MatthewAinsworth
    • #5
    • 5th Jul 18, 6:45 AM
    • #5
    • 5th Jul 18, 6:45 AM
    Essentially the switch to CPI could explain the root of the differences between baby boomers and millenials (ie interest rates)
    • masonic
    • By masonic 5th Jul 18, 7:00 AM
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    masonic
    • #6
    • 5th Jul 18, 7:00 AM
    • #6
    • 5th Jul 18, 7:00 AM
    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
    Originally posted by MatthewAinsworth
    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?
    • Economic
    • By Economic 5th Jul 18, 8:45 AM
    • 302 Posts
    • 304 Thanks
    Economic
    • #7
    • 5th Jul 18, 8:45 AM
    • #7
    • 5th Jul 18, 8:45 AM
    Essentially the switch to CPI could explain the root of the differences between baby boomers and millenials (ie interest rates)
    Originally posted by MatthewAinsworth
    Your argument is utter nonsense.
    • MatthewAinsworth
    • By MatthewAinsworth 5th Jul 18, 9:53 AM
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    MatthewAinsworth
    • #8
    • 5th Jul 18, 9:53 AM
    • #8
    • 5th Jul 18, 9:53 AM
    How come, economic?
    • dunstonh
    • By dunstonh 5th Jul 18, 10:02 AM
    • 94,498 Posts
    • 62,449 Thanks
    dunstonh
    • #9
    • 5th Jul 18, 10:02 AM
    • #9
    • 5th Jul 18, 10:02 AM
    Essentially the switch to CPI could explain the root of the differences between baby boomers and millenials (ie interest rates)
    Originally posted by MatthewAinsworth
    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.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
    • Zanderman
    • By Zanderman 5th Jul 18, 10:06 AM
    • 1,802 Posts
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    Zanderman
    Essentially the switch to CPI could explain the root of the differences between baby boomers and millenials (ie interest rates)
    Originally posted by MatthewAinsworth
    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.
    • MatthewAinsworth
    • By MatthewAinsworth 5th Jul 18, 10:50 AM
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    MatthewAinsworth
    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
    • Zanderman
    • By Zanderman 5th Jul 18, 11:01 AM
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    Zanderman
    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
    Originally posted by MatthewAinsworth
    I wasn't talking about the public. I was referring to financial journalists. They will understand this (much better than you or I) - and if CPI/RPI index switching was the root cause of the current low rates they would be shouting it from the rooftops. It would be the major theme of every story about interest rates. A huge story. But they aren't.
    • masonic
    • By masonic 5th Jul 18, 5:47 PM
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    masonic
    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
    Originally posted by MatthewAinsworth
    Interest rates are uncorrelated with any measure of inflation and have been for the last 10 years. The reasons they are no longer correlated are well understood. I suggest you peruse the minutes of the monthly MPC meetings and reporting of the global financial crisis, quantitative easing, etc.
    • MatthewAinsworth
    • By MatthewAinsworth 5th Jul 18, 5:49 PM
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    MatthewAinsworth
    That could be lack of evidence so far, as it's still early days and there have been other, easier to explain factors, but I think something can exist before it gains traction - ie it's only fairly recently that people started wanting house prices to slow down, I remember when ruses were always seen as good, or as another example why did rpi persist so long if it was wrong? Why do people still doubt global warming? - the world is slow to change, especially when it doesn't want to
    • Zanderman
    • By Zanderman 5th Jul 18, 6:19 PM
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    Zanderman
    That could be lack of evidence so far, as it's still early days and there have been other, easier to explain factors, but I think something can exist before it gains traction - ie it's only fairly recently that people started wanting house prices to slow down, I remember when ruses were always seen as good, or as another example why did rpi persist so long if it was wrong? Why do people still doubt global warming? - the world is slow to change, especially when it doesn't want to
    Originally posted by MatthewAinsworth
    Well, as you've not presented any evidence to speak of then perhaps there is a lack of it. That doesn't make your hypothesis more credible - it makes it less so.

    As for house prices, I've never supported them rising and don't understand why the average single home 'man in the street' does (if they do). If you already own a property it's all relative, if you don't it makes life difficult.

    I'm not sure the comparison to global warming is relevant - there is an overwhelming majority of expert opinion that supports that concept. The doubters are, in that case, clearly wrong and have been clearly wrong for decades. Your concept, on what you've said so far, doesn't seem to be supported at all. So the doubters (i.e. the respondents in this thread) seem perfectly reasonable. Possibly because you may well be wrong.
    • masonic
    • By masonic 5th Jul 18, 8:18 PM
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    masonic
    This thread is beginning to remind me of the saying: "Everyone is entitled to his own opinion, but not to his own facts."
    • Thrugelmir
    • By Thrugelmir 5th Jul 18, 8:33 PM
    • 59,791 Posts
    • 53,130 Thanks
    Thrugelmir
    the world is slow to change,
    Originally posted by MatthewAinsworth
    The world has changed more than people realise in a short space of time. Even Trump for all his faults. Sees the dangers that are being posed.
    Financial disasters happen when the last person who can remember what went wrong last time has left the building.
    • MatthewAinsworth
    • By MatthewAinsworth 5th Jul 18, 8:35 PM
    • 3,105 Posts
    • 1,234 Thanks
    MatthewAinsworth
    Zanderman - could be wrong, can conclude yet
    People wanted house prices to rise so that they would release equity through remortgaging to spend in the economy

    I do believe in global warming but I don't think it really matters if half the species on the planet and a few archipelagos dissapear
    • antrobus
    • By antrobus 5th Jul 18, 9:02 PM
    • 16,024 Posts
    • 22,852 Thanks
    antrobus
    That could be lack of evidence so far, as it's still early days and there have been other, easier to explain factors, but I think something can exist before it gains traction -
    Originally posted by MatthewAinsworth
    It only exists in your own mind. If you want it to gain 'traction', you are going to need a paper published.

    ie it's only fairly recently that people started wanting house prices to slow down,
    Originally posted by MatthewAinsworth
    What's your evidence for that claim?

    I remember when ruses were always seen as good, or as another example why did rpi persist so long if it was wrong? Why do people still doubt global warming? - the world is slow to change, especially when it doesn't want to
    Originally posted by MatthewAinsworth
    The world has changed remarkably quickly over my lifetime, The USSR has gone, China has abandoned communism, we have the internet, people walk around with telephones in their pockets, and England has won a World Cup penalty shoot out.
    • MatthewAinsworth
    • By MatthewAinsworth 5th Jul 18, 9:55 PM
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    MatthewAinsworth
    Antrobus - Its merely speculative, I gain nothing from it gaining traction, I merely predict that with time it might gain traction from other people's discovery, and testing the idea in my own mind

    I don't have evidence other than what I remember reading in papers at the time, the cheer when prices rose, the view that the economy relied in people using their houses like ATMS

    Those things still took a whole lifetime to happen, and before the industrial revolution mankind did not very much for quite a while. I think in the past social immobility slowed progress and, although that's better now, especially with Internet, there is room for improvement
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