Is rising inflation looming?

[servodude]

Try either:
1. A chart of inflation rather than the price index.
2. A semi-log chart of the price index.

Either of the above will inform you infinitely better than the one you chose. Any series which grows geometrically should have a characteristic exponential shape on a linear plot, the chart you posted doesn't even show that. So if understood correctly it actually demonstrates clearly that inflation has NOT grown geometrically -- which is the opposite of what you are trying to say.

GS

For inflation to have grown exponentially by the amount shown over the 75 year time period (about 46x) it would have had to have risen by just over 5% p.a. Instead it has periods of relative quiescence interrupted by big jumps.

BoE

Apologies and well spotted -- in my post "inflation has NOT grown geometrically" should have read "the price index has NOT grown geometrically".

GS

Isn't inflation (in this context) by definition/convention the annual measure of the geometric grown of "something" (in this case the price index)?
- that's why it's expressed in % or as a proportion

[GoSeigen]

Try either:
1. A chart of inflation rather than the price index.
2. A semi-log chart of the price index.

Either of the above will inform you infinitely better than the one you chose. Any series which grows geometrically should have a characteristic exponential shape on a linear plot, the chart you posted doesn't even show that. So if understood correctly it actually demonstrates clearly that inflation has NOT grown geometrically -- which is the opposite of what you are trying to say.

GS

For inflation to have grown exponentially by the amount shown over the 75 year time period (about 46x) it would have had to have risen by just over 5% p.a. Instead it has periods of relative quiescence interrupted by big jumps.

BoE

Apologies and well spotted -- in my post "inflation has NOT grown geometrically" should have read "the price index has NOT grown geometrically".

GS

Isn't inflation (in this context) by definition/convention the annual measure of the geometric grown of "something" (in this case the price index)?
- that's why it's expressed in % or as a proportion

Yes, correct. The chart schober originally linked to was of the underlying index and was a linear chart (not semilog). If inflation had remained high it would have been a clear exponential shape; however the plot showed that, although the index was rising linearly, that meant inflation was actually declining over the period, not that it had been a problem ever since the 1970s then which was schober's interpretation.

If properly plotted on a semi-log chart an index growing with constant inflation would be a straight line. The semi-log plot of the UK price index after the 1970s is far from a straight line. Here is an example:


Source: St Louis Fed

It clearly shows inflation declining and then remaining as low as ever (shallow slope) from the mid 80s/early 90s all the way through to last year.

Compounding is difficult to grasp sometimes. It pays an investor to get his/her head around it.


GS

[servodude]

Try either:
1. A chart of inflation rather than the price index.
2. A semi-log chart of the price index.

Either of the above will inform you infinitely better than the one you chose. Any series which grows geometrically should have a characteristic exponential shape on a linear plot, the chart you posted doesn't even show that. So if understood correctly it actually demonstrates clearly that inflation has NOT grown geometrically -- which is the opposite of what you are trying to say.

GS

For inflation to have grown exponentially by the amount shown over the 75 year time period (about 46x) it would have had to have risen by just over 5% p.a. Instead it has periods of relative quiescence interrupted by big jumps.

BoE

Apologies and well spotted -- in my post "inflation has NOT grown geometrically" should have read "the price index has NOT grown geometrically".

GS

Isn't inflation (in this context) by definition/convention the annual measure of the geometric grown of "something" (in this case the price index)?
- that's why it's expressed in % or as a proportion

Yes, correct. The chart schober originally linked to was of the underlying index and was a linear chart (not semilog). If inflation had remained high it would have been a clear exponential shape; however the plot showed that, although the index was rising linearly, that meant inflation was actually declining over the period, not that it had been a problem ever since the 1970s then which was schober's interpretation.

If properly plotted on a semi-log chart an index growing with constant inflation would be a straight line. The semi-log plot of the UK price index after the 1970s is far from a straight line. Here is an example:


Source: St Louis Fed

It clearly shows inflation declining and then remaining as low as ever (shallow slope) from the mid 80s/early 90s all the way through to last year.

Compounding is difficult to grasp sometimes. It pays an investor to get his/her head around it.


GS

Indeed.
So saying that the "price index wasn't growing geometrically" seems not as correct as pointing out that it was growing geometrically at changing (reducing) rates
- which as you point out is clear when you look at it on (the appropriate) semilog plot

[GoSeigen]

Indeed.
So saying that the "price index wasn't growing geometrically" seems not as correct as pointing out that it was growing geometrically at changing (reducing) rates
- which as you point out is clear when you look at it on (the appropriate) semilog plot

For sure. I was not very concise on that point. However, using the word "inflation" in the place of "price index" a few posts back was just a flat out typo, not at all what I intended to write.

[Aside: A similar discussion was had regarding COVID. I think it took way too long for people to understand that the dangerous exponential phase of the pandemic was only the first few weeks, when the exponential growth rate was dizzying and no-one knew whether there would be thousands of deaths or millions. From July-ish 2020 it really was clear that we had a handle on how rapid the spread would be; from May 2020 the growth has been approximately linear, similar to other illnesses which have seasonal outbreaks.]


GS

[Bubblesofearth]

Although inflation has been volatile it's maybe worth noting that the Bank of England does target exponential growth of cpi

BoE

[GoSeigen]

Although inflation has been volatile it's maybe worth noting that the Bank of England does target exponential growth of cpi

BoE

Which is rather like saying the captain of a ship targets open channels of water!


GS

[Bubblesofearth]

Which is rather like saying the captain of a ship targets open channels of water!


GS

Sure but I go back to your statement that it is very important for investors to understand compounding.

BoE

[vand]

anecdotally, I just did a little shop for the next few days at my local co-op and there's been another round of price hikes on many items. Bacon, cheese, eggs, produce all had another 10-15% tacked on. You can see the locals thumbing the price on everything they pick up and remembering how it used to cost less. We're not through the worst of it yet, I feel.

[Tara]

Does anyone seriously think that the BoE will actually do what is required required to fight inflation? With inflation at 10% and interest rates at 1% it certainly does not look like it.

Any central bank that was really concerned about 10% inflation would have already put interest rates up to at least 4%. And the same also applies to the ECB and to the Fed.

It seems that the BoE is far more interested in propping up the absurdly overvalued property market in the UK, than it is in fighting 10% inflation.

[TheMotorcycleBoy]

Does anyone seriously think that the BoE will actually do what is required required to fight inflation? With inflation at 10% and interest rates at 1% it certainly does not look like it.

Any central bank that was really concerned about 10% inflation would have already put interest rates up to at least 4%. And the same also applies to the ECB and to the Fed.

It seems that the BoE is far more interested in propping up the absurdly overvalued property market in the UK, than it is in fighting 10% inflation.

I think that with many things, the last thing that the CBs should be doing is increasing rates.

Inflation in the UK is almost entirely supply-side. Absolutely nothing the BoE can do, IMHO.

1. Oil/gas supplies
2. Food supplies (especially grain)
3. Manufactured good supplies (Chinese factories on lock down)
4. Metals (resulting from closure of Russia supplies)
5. Labour supplies (many EE workers returning home post Brexit or Covid)
6. etc.

Matt

[vand]

Does anyone seriously think that the BoE will actually do what is required required to fight inflation? With inflation at 10% and interest rates at 1% it certainly does not look like it.

Any central bank that was really concerned about 10% inflation would have already put interest rates up to at least 4%. And the same also applies to the ECB and to the Fed.

It seems that the BoE is far more interested in propping up the absurdly overvalued property market in the UK, than it is in fighting 10% inflation.

I think that with many things, the last thing that the CBs should be doing is increasing rates.

Inflation in the UK is almost entirely supply-side. Absolutely nothing the BoE can do, IMHO.

1. Oil/gas supplies
2. Food supplies (especially grain)
3. Manufactured good supplies (Chinese factories on lock down)
4. Metals (resulting from closure of Russia supplies)
5. Labour supplies (many EE workers returning home post Brexit or Covid)
6. etc.

Matt

I have to disagree strongly. We've seen a huge boom in demand for home extensions etc all fueled by ultra low interest rates. If you can tack on a 30sqm onto your existing home while keeping payments the same as what you currently pay then its no surprise that there's been a huge explosion in demand for physical assets. This is worldwide, not just UK. When interest rates are on the floor then many capital intensive projects get greenlighted because the long term cost of funding them falls dramatically.

Interest rates play a function to coordinate production across time.

Austrian business cycle theory is very good at explaining this:

https://www.youtube.com/watch?v=9a-eUKjnDfM

[TheMotorcycleBoy]

Does anyone seriously think that the BoE will actually do what is required required to fight inflation? With inflation at 10% and interest rates at 1% it certainly does not look like it.

Any central bank that was really concerned about 10% inflation would have already put interest rates up to at least 4%. And the same also applies to the ECB and to the Fed.

It seems that the BoE is far more interested in propping up the absurdly overvalued property market in the UK, than it is in fighting 10% inflation.

I think that with many things, the last thing that the CBs should be doing is increasing rates.

Inflation in the UK is almost entirely supply-side. Absolutely nothing the BoE can do, IMHO.

1. Oil/gas supplies
2. Food supplies (especially grain)
3. Manufactured good supplies (Chinese factories on lock down)
4. Metals (resulting from closure of Russia supplies)
5. Labour supplies (many EE workers returning home post Brexit or Covid)
6. etc.

Matt

I have to disagree strongly. We've seen a huge boom in demand for home extensions etc all fueled by ultra low interest rates. If you can tack on a 30sqm onto your existing home while keeping payments the same as what you currently pay then its no surprise that there's been a huge explosion in demand for physical assets. This is worldwide, not just UK. When interest rates are on the floor then many capital intensive projects get greenlighted because the long term cost of funding them falls dramatically.

Interest rates play a function to coordinate production across time.

Austrian business cycle theory is very good at explaining this:

https://www.youtube.com/watch?v=9a-eUKjnDfM

Whilst I'm sure that some people are wishing to extend their properties, aren't those expenditures insignificant in comparison to billions of the world's population struggling with higher food, energy and material costs (resulting from shortages) ?

Anecdotally...

anecdotally, I just did a little shop for the next few days at my local co-op and there's been another round of price hikes on many items. Bacon, cheese, eggs, produce all had another 10-15% tacked on. You can see the locals thumbing the price on everything they pick up and remembering how it used to cost less. We're not through the worst of it yet, I feel.

How many of the locals you spotted (as a fraction) you would say, were also extending their houses, in addition to struggling to keep their weekly expenditures down?

I have to admit none in my immediate neighbourhood of 12 or so middle class dwellings, are currently extending their homes. But all will be buying food, energy, manufactured goods etc.

Matt

[Bubblesofearth]

Inflation in the UK is almost entirely supply-side. Absolutely nothing the BoE can do, IMHO.



Matt

I would argue a combination of supply-side and civid-inspired money printing will combine as the trigger. But we are already seeing the start of pressure for a wage-price spiral similar to what happened in the 70's, which also had a big supply side push (oil). A difference now is that a lot of benefits are inflation linked. We also have the minimum wage now which will also rise with inflation and act as a floor for other wage deals.

BoE

[Alaric]

A difference now is that a lot of benefits are inflation linked.

Not just benefits. Mobile phone contracts for example that are supposedly fixed for twelve months may have a clause enabling providers to increase prices with inflation. Harmless if it's CPI at 1%, less so when it's RPI at 12%.

Other exemples where RPI linkaage will bite are train fares and student loans.

[Tara]

Does anyone seriously think that the BoE will actually do what is required required to fight inflation? With inflation at 10% and interest rates at 1% it certainly does not look like it.

Any central bank that was really concerned about 10% inflation would have already put interest rates up to at least 4%. And the same also applies to the ECB and to the Fed.

It seems that the BoE is far more interested in propping up the absurdly overvalued property market in the UK, than it is in fighting 10% inflation.

I think that with many things, the last thing that the CBs should be doing is increasing rates.

Matt

Yes we would not want to upset the rich and the middle class property owners in any way by raising interest rates to the correct level, and reducing the prices of their houses and their property portfolios.

Far better just to keep interest rates at an absurdly low level, let inflation soar, and let the poor in the UK and rest of the world go hungry.

[GoSeigen]

This is not the 1970s redux.

1930s/40s maybe...

GS

[vand]

Does anyone seriously think that the BoE will actually do what is required required to fight inflation? With inflation at 10% and interest rates at 1% it certainly does not look like it.

Any central bank that was really concerned about 10% inflation would have already put interest rates up to at least 4%. And the same also applies to the ECB and to the Fed.

It seems that the BoE is far more interested in propping up the absurdly overvalued property market in the UK, than it is in fighting 10% inflation.

I think that with many things, the last thing that the CBs should be doing is increasing rates.

Inflation in the UK is almost entirely supply-side. Absolutely nothing the BoE can do, IMHO.

1. Oil/gas supplies
2. Food supplies (especially grain)
3. Manufactured good supplies (Chinese factories on lock down)
4. Metals (resulting from closure of Russia supplies)
5. Labour supplies (many EE workers returning home post Brexit or Covid)
6. etc.

Matt

I have to disagree strongly. We've seen a huge boom in demand for home extensions etc all fueled by ultra low interest rates. If you can tack on a 30sqm onto your existing home while keeping payments the same as what you currently pay then its no surprise that there's been a huge explosion in demand for physical assets. This is worldwide, not just UK. When interest rates are on the floor then many capital intensive projects get greenlighted because the long term cost of funding them falls dramatically.

Interest rates play a function to coordinate production across time.

Austrian business cycle theory is very good at explaining this:

https://www.youtube.com/watch?v=9a-eUKjnDfM

Whilst I'm sure that some people are wishing to extend their properties, aren't those expenditures insignificant in comparison to billions of the world's population struggling with higher food, energy and material costs (resulting from shortages) ?

Anecdotally...

anecdotally, I just did a little shop for the next few days at my local co-op and there's been another round of price hikes on many items. Bacon, cheese, eggs, produce all had another 10-15% tacked on. You can see the locals thumbing the price on everything they pick up and remembering how it used to cost less. We're not through the worst of it yet, I feel.

How many of the locals you spotted (as a fraction) you would say, were also extending their houses, in addition to struggling to keep their weekly expenditures down?

I have to admit none in my immediate neighbourhood of 12 or so middle class dwellings, are currently extending their homes. But all will be buying food, energy, manufactured goods etc.

Matt

There's loads of building projects going on in my area. Absolutely tonnes. Try getting a builder in London - you can't; they're all booked up months and months in advance.

[GoSeigen]

Yes we would not want to upset the rich and the middle class property owners in any way by raising interest rates to the correct level, and reducing the prices of their houses and their property portfolios.

Far better just to keep interest rates at an absurdly low level, let inflation soar, and let the poor in the UK and rest of the world go hungry.

This analysis ignores completely the monetary and fiscal developments of the last decade and a half, the fact that most interest rates are set by the market and that there is an entire world beyond the shores of the UK.

GS

[Bubblesofearth]

This is not the 1970s redux.

1930s/40s maybe...

GS

Care to expand? Back then we were on the gold standard.

Much higher debt levels are a difference to the 70's but hardly a good one.

BoE

[vand]

This is not the 1970s redux.

1930s/40s maybe...

GS

You keep saying that with absolutely no evidence to back it up.

Why wouldn't it be the same? Inflation is ultimately caused by mismanagement of economic and monetary policies, and over the last decade we've made very foolish policy decisions that may only now be coming home to roost.

The very fact that economies have become so indebted that they cannot afford to raise interest rates significantly enough to fight inflation is the most significant reason why it will persist

And the 1970s are hardly a "worst case" scenario - many economies have suffered from far worst inflationary periods that what the UK went through in the 1970s.