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Is rising inflation looming?

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dealtn
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Re: Is rising inflation looming?

#295370

Postby dealtn » March 29th, 2020, 1:08 pm

johnhemming wrote:
dealtn wrote: Hence better arguments are required to explain why that will be the case.

There are, in fact, two aspects of economic challenge. Those that relate to the direct actions taken by this country and those which arise from the global position. It is sensible for the government to take action to protect the economy from both of those aspects.

The government will probably have to expand the range of businesses that can get government underwritten loans as the current rules may be too tight and even though lower paid staff can be furloughed at 80% of their salary without the business having to contribute other than administratively there will be quite a bit of fixed costs for which funds can be borrowed, but which will require repayment at some stage.


All of which may be true, but equally applicable to other countries too I would suggest. So why are there arguments that the UK will suffer "relatively" to others such that we will have a currency that is devaluing, or that we will have a higher inflation rate?

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Re: Is rising inflation looming?

#295374

Postby johnhemming » March 29th, 2020, 1:16 pm

It is really a question as to in relation to which country.

Its really too early to say at the moment anyway.

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Re: Is rising inflation looming?

#295474

Postby johnhemming » March 29th, 2020, 5:33 pm

Whatever happens I don't think will be seen as being subtle nuances of a few basis points. I think there is perhaps a more co-operative perspective in the world today, but I would not think it would last that long.

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Re: Is rising inflation looming?

#295513

Postby GoSeigen » March 29th, 2020, 7:44 pm

TheMotorcycleBoy wrote:Hi folks,

I'm definitely no economics expert [*], but is it possible that the easing currently being implemented combined with supply shortages will engender inflation over the next few months?

(Hmm. excepting decline in oil price (cost of energy), and fall in house purchases.

Matt

[*] Have started reading https://www.amazon.co.uk/Keynes-Keynesi ... 1848442394


MCB

I'm not expecting a general rapid rise in long-term inflation yet, but rather short, very severe spikes in inflation -- pretty much for the reasons you've given.

GS

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Re: Is rising inflation looming?

#295562

Postby Stonge » March 29th, 2020, 10:34 pm

dealtn wrote:So why are there arguments that the UK will suffer "relatively" to others such that we will have a currency that is devaluing, or that we will have a higher inflation rate?


Don't want this thread to end up on PD so won't state the obvious.

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Re: Is rising inflation looming?

#295616

Postby Charlottesquare » March 30th, 2020, 9:06 am

johnhemming wrote:A lot really depends upon how long the period of almost lockdown goes on for. I think the country will probably face difficulties relating to the gradual devaluation of sterling. That is likely to drive into prices. It does have the benefit that the economic pain caused by this process is essentially shared in proportion to people's wealth.

Because a similar problem is occurring in the rest of the northern hemisphere temperate zone it may not be that obvious, but it remains to be seen exactly what happens. It is not sustainable in the long term, but is sustainable in the really short term. Where the boundary lies is unclear.


Devaluation relative to which countries? At this stage I am not sure what devaluation will occur against both the dollar and the Euro over the course, I suspect there are more financial plays within both of these areas (and by ourselves) which will impact their money supplies.

Possibly against China there is a case if they have got a hold of the virus, but to me that is a big if .

If three currencies all increase their money supplies by 25% what impact ought that to have on the exchange rates prevailing amongst their three currencies?

The key here is we are not isolated actors.

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Re: Is rising inflation looming?

#295622

Postby johnhemming » March 30th, 2020, 9:25 am

That's true, but they are all in the northern hemisphere.

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Re: Is rising inflation looming?

#295669

Postby dspp » March 30th, 2020, 12:20 pm

Gbp is remarkably close to a simultaneous 20 year low against both eur and usd.

Since cv19 is everywhere it is clearly another factor in play. I cant quite put my finger on what it might be, but I suspect it could get a lot worse as it becomes apparent.

Regards, dspp

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Re: Is rising inflation looming?

#296593

Postby TheMotorcycleBoy » April 1st, 2020, 3:36 pm

GoSeigen wrote:
TheMotorcycleBoy wrote:Hi folks,

I'm definitely no economics expert [*], but is it possible that the easing currently being implemented combined with supply shortages will engender inflation over the next few months?

(Hmm. excepting decline in oil price (cost of energy), and fall in house purchases.

Matt

[*] Have started reading https://www.amazon.co.uk/Keynes-Keynesi ... 1848442394


MCB

I'm not expecting a general rapid rise in long-term inflation yet, but rather short, very severe spikes in inflation -- pretty much for the reasons you've given.

GS

When you remark "rather short, very severe spikes in inflation", do you mean say rising by 3 or so % above the bank base rate for the odd couple of months?

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Re: Is rising inflation looming?

#296654

Postby GoSeigen » April 1st, 2020, 6:04 pm

TheMotorcycleBoy wrote:
GoSeigen wrote:I'm not expecting a general rapid rise in long-term inflation yet, but rather short, very severe spikes in inflation -- pretty much for the reasons you've given.

GS

When you remark "rather short, very severe spikes in inflation", do you mean say rising by 3 or so % above the bank base rate for the odd couple of months?


More like 30-100% (annualised) for few months. This is just a hunch. I think inflation has been too eerily quiet for too long. Note that the latest stimulus has little to do with inflation expectations. It is purely a bung, or experiment, to try to save the economy from the deliberate vandalism of governments dealing with virus terror.


GS

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Re: Is rising inflation looming?

#296656

Postby Arborbridge » April 1st, 2020, 6:10 pm

GoSeigen wrote:to try to save the economy from the deliberate vandalism of governments dealing with virus terror.


GS


Sorry? -What?

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Re: Is rising inflation looming?

#296802

Postby TheMotorcycleBoy » April 2nd, 2020, 4:56 am

I was chatting to Mel about this last night. She reckons staples like pasta (i.e. the same sort we usually have, tesco fusilli 500g) and milk have already had a couple of pence added to their prices.

https://www.theguardian.com/food/2020/m ... the-moment
https://uk.finance.yahoo.com/news/uk-in ... 02774.html

The sad thing being that prices of food / car parts etc. will definitely rise, but wages for the lower paid folks I imagine won't.

Matt

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Re: Is rising inflation looming?

#296873

Postby bungeejumper » April 2nd, 2020, 10:02 am

TheMotorcycleBoy wrote:I was chatting to Mel about this last night. She reckons staples like pasta (i.e. the same sort we usually have, tesco fusilli 500g) and milk have already had a couple of pence added to their prices.

Supply and demand, innit? If the world's panic-buying pasta, the wholesale price goes up and so do the retail prices. I'd expect that viva voce :) would apply when the demand falls off again?

I'm not quite so sure about car parts, though. Demand for the whole sector must already be falling off a cliff - indeed, I've seen industry conjecture that even new cars will be selling at hefty discounts in the autumn. What strange times we're living in.

BJ

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Re: Is rising inflation looming?

#296921

Postby TheMotorcycleBoy » April 2nd, 2020, 11:19 am

bungeejumper wrote:
TheMotorcycleBoy wrote:I was chatting to Mel about this last night. She reckons staples like pasta (i.e. the same sort we usually have, tesco fusilli 500g) and milk have already had a couple of pence added to their prices.

Supply and demand, innit? If the world's panic-buying pasta, the wholesale price goes up and so do the retail prices. I'd expect that viva voce :) would apply when the demand falls off again?

I'm not quite so sure about car parts, though. Demand for the whole sector must already be falling off a cliff - indeed, I've seen industry conjecture that even new cars will be selling at hefty discounts in the autumn. What strange times we're living in.

BJ

Hmm. So indeed we experience inflated prices of many staples (not just pasta).

re. car parts. Basically you can't (accordingly to my pal about 10 doors up, about 1/2 mile in the fens) purchase parts anyone. What with JIT production there aint none on the shelves of MotorPartsDirect, EuroParts etc. My point is that ppl are still driving so if a clutch/suspension arm etc. etc. fails they are paying top dollar to source the necessary.

Matt

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Re: Is rising inflation looming?

#296929

Postby dealtn » April 2nd, 2020, 11:27 am

TheMotorcycleBoy wrote:
bungeejumper wrote:
TheMotorcycleBoy wrote:I was chatting to Mel about this last night. She reckons staples like pasta (i.e. the same sort we usually have, tesco fusilli 500g) and milk have already had a couple of pence added to their prices.

Supply and demand, innit? If the world's panic-buying pasta, the wholesale price goes up and so do the retail prices. I'd expect that viva voce :) would apply when the demand falls off again?

I'm not quite so sure about car parts, though. Demand for the whole sector must already be falling off a cliff - indeed, I've seen industry conjecture that even new cars will be selling at hefty discounts in the autumn. What strange times we're living in.

BJ

Hmm. So indeed we experience inflated prices of many staples (not just pasta).

re. car parts. Basically you can't (accordingly to my pal about 10 doors up, about 1/2 mile in the fens) purchase parts anyone. What with JIT production there aint none on the shelves of MotorPartsDirect, EuroParts etc. My point is that ppl are still driving so if a clutch/suspension arm etc. etc. fails they are paying top dollar to source the necessary.

Matt


Price is the interaction of Supply and Demand.

Demand has fallen, but so has Supply. For some goods the "clearing" price has gone up, for some it has gone down. As someone put it earlier "Supply and demand, innit?"

The (more) interesting question, is what happens beyond the short-term.

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Re: Is rising inflation looming?

#296951

Postby TheMotorcycleBoy » April 2nd, 2020, 12:11 pm

dealtn wrote:
TheMotorcycleBoy wrote:
bungeejumper wrote:Supply and demand, innit? If the world's panic-buying pasta, the wholesale price goes up and so do the retail prices. I'd expect that viva voce :) would apply when the demand falls off again?

I'm not quite so sure about car parts, though. Demand for the whole sector must already be falling off a cliff - indeed, I've seen industry conjecture that even new cars will be selling at hefty discounts in the autumn. What strange times we're living in.

BJ

Hmm. So indeed we experience inflated prices of many staples (not just pasta).

re. car parts. Basically you can't (accordingly to my pal about 10 doors up, about 1/2 mile in the fens) purchase parts anyone. What with JIT production there aint none on the shelves of MotorPartsDirect, EuroParts etc. My point is that ppl are still driving so if a clutch/suspension arm etc. etc. fails they are paying top dollar to source the necessary.

Matt


Price is the interaction of Supply and Demand.

Demand has fallen, but so has Supply. For some goods the "clearing" price has gone up, for some it has gone down. As someone put it earlier "Supply and demand, innit?"

Hi Dealtn,

I understand all this stuff, and the stuff about long dated bond yields being a proxy for market feelings re. inflation etc. etc.. But both anecdotally (wife's experience in shops) and by reference to the articles I linked in this post prices of things have actually risen. IOW disregarding the classroom stuff there is some inflation currently happened somewhere

The (more) interesting question, is what happens beyond the short-term.

I totally agree. Medical staff will want more sponds. The demand for new health facilities will rise. But my key point was still my OP, i.e. whilst we are experiencing these shortages, £££ have been lobbed into the system into the fuel and childcare bills are slashed, so many ppl will still actually have £££ to spend in the midst of all this.

Matt

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Re: Is rising inflation looming?

#296954

Postby bungeejumper » April 2nd, 2020, 12:16 pm

TheMotorcycleBoy wrote:re. car parts. Basically you can't (accordingly to my pal about 10 doors up, about 1/2 mile in the fens) purchase parts anyone. What with JIT production there aint none on the shelves of MotorPartsDirect, EuroParts etc. My point is that ppl are still driving so if a clutch/suspension arm etc. etc. fails they are paying top dollar to source the necessary.

Good point, and well taken, thanks. :)

Only yesterday, I was moving the wife's car from one part of the drive to another, and it flashed up a routine service alert. Fat chance, I thought, I'm not shelling out for a service while the car's not being driven. (It's ten years old, so there'd be no serious impact on its s/h value.) But I hadn't properly figured that my garage might not be able to get the parts anyway?

Since China seems (or anyway claims!) to be getting back to work now, I'd imagine that short-term shortages of routine items will probably ease. But getting hold of an Arbuthnot spigot for the anticyclical preposterator on your Range Rooney might remain a problem for some time yet.

BJ

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Re: Is rising inflation looming?

#296966

Postby TheMotorcycleBoy » April 2nd, 2020, 12:50 pm

colin wrote:Over the next two years gilt market has priced inflation of just over 2% pa so not much change there, of course if TheMotorcycleBoy has read the sensible investing books recommended to him a while back then he will know how much weight to place on that expectation, but certainly it's a better way of getting some idea of what 'every one else' thinks than inviting a cacophony of conflicting opinions on the internet.

To be frank, I'm interested in all these matters, and have read some and am interested in reading more.

Let me ask you something if you don't mind. Firstly if you open this link https://seekingalpha.com/article/427635 ... -weirdness and search out "Exhibit 4: the U.K", then can you answer me: Which maturity gilts do we use as the proxy for CPI inflation? The 30yr bond, 48yr one, etc.?

Then if you look at this page: https://www.ons.gov.uk/economy/inflatio ... ctober2019 observe that through from period aug-oct, measured CPI inflation seemingly just slightly (1.5-1.7%) above that forecast by 30 yr gilt yields (for example about 1.4% ), but the similarity is still impressive.

FWIW I find the concept (and reality) of this equivalence quite interesting. What is it actually telling us? My first thoughts are that there must a very large mixed class of investors that are prepared to accept an asset class whose yields mean that the £££ they put down at time X will be exchangeable for the exactly same value of money to some point in the future. Hopefully. Pension funds I guess.

I also wonder, what forces such (long dated) gilt yields up or down. I imagine a super-rich yacht owner tycoon who thinks "Shall I buy a new yacht this month?". "Hmm I suspect inflation, hence prices, are rising soon, I better spend my £££ now before it loses value". Hence he cashes in all his 30 yr gilts making their price fall, and hence their yield rise. I did the same thought experiment in reverse, and that made sense too.

Matt

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Re: Is rising inflation looming?

#296996

Postby anon155742 » April 2nd, 2020, 1:52 pm

I imagine that many of us here, especially those close to retirement, will be keeping a track of our spending. It might not be 100% accurate since one months shop will not be the exact same as the next month or the next years, but it does allow a degree of personal inflation tracking.

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Re: Is rising inflation looming?

#297083

Postby dealtn » April 2nd, 2020, 5:02 pm

TheMotorcycleBoy wrote:
colin wrote:Over the next two years gilt market has priced inflation of just over 2% pa so not much change there, of course if TheMotorcycleBoy has read the sensible investing books recommended to him a while back then he will know how much weight to place on that expectation, but certainly it's a better way of getting some idea of what 'every one else' thinks than inviting a cacophony of conflicting opinions on the internet.

To be frank, I'm interested in all these matters, and have read some and am interested in reading more.

Let me ask you something if you don't mind. Firstly if you open this link https://seekingalpha.com/article/427635 ... -weirdness and search out "Exhibit 4: the U.K", then can you answer me: Which maturity gilts do we use as the proxy for CPI inflation? The 30yr bond, 48yr one, etc.?

Then if you look at this page: https://www.ons.gov.uk/economy/inflatio ... ctober2019 observe that through from period aug-oct, measured CPI inflation seemingly just slightly (1.5-1.7%) above that forecast by 30 yr gilt yields (for example about 1.4% ), but the similarity is still impressive.

FWIW I find the concept (and reality) of this equivalence quite interesting. What is it actually telling us? My first thoughts are that there must a very large mixed class of investors that are prepared to accept an asset class whose yields mean that the £££ they put down at time X will be exchangeable for the exactly same value of money to some point in the future. Hopefully. Pension funds I guess.

I also wonder, what forces such (long dated) gilt yields up or down. I imagine a super-rich yacht owner tycoon who thinks "Shall I buy a new yacht this month?". "Hmm I suspect inflation, hence prices, are rising soon, I better spend my £££ now before it loses value". Hence he cashes in all his 30 yr gilts making their price fall, and hence their yield rise. I did the same thought experiment in reverse, and that made sense too.

Matt


The inflation rate isn't derived from the gilt curve in that way.

Each point on that curve is (very simplistically) an average of the daily gilt yield from today, repeated daily, until that maturity date. But that is an interest rate, not an inflation rate. Similarly we have an index linked gilt curve, and every point on that curve is the "average of the daily rate on the linker curve". But this isn't an inflation curve either. However by combining the two curves you can derive the inflation rate, combining the (forward) "yield curve" with the (forward) "real yield curve" you can plot a market implied path of inflation.

Now it is even more complicated than that. Firstly because the Index Linked Gilts are RPI instruments, and you are looking for CPI. This too though can be calculated, since a CPI-RPI inflation derivative curve also exists, to allow CPI paths to be constructed also.

Most importantly though this "theory" all assumes the supply-demand equilibrium that derives the prices, and hence yields (and thence inflation) are all "perfect". But they (very much) aren't. Firstly there is a lack of liquidity. Then you have to consider the distortions in (both) Gilt markets, where for some time, and likely to continue for some time, a large "extra" demand exists from pension funds "obliged" to liability match, which distorts the true price. Then you have similar distortions due to historic, and now current QE. Then you also need to factor in what is the "Government Credit curve". That is to say part of the required yield for Gilts, especially in the long end, reflects the (tiny but growing) possibility that the Government might not be able to pay back the borrowing (or will engage in deliberate inflation to erode the real size of the debt).

So. It's very complicated.


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