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Is rising inflation looming?

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1nvest
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Re: Is rising inflation looming?

#421014

Postby 1nvest » June 20th, 2021, 8:47 pm

ursaminortaur wrote:
1nvest wrote:
88V8 wrote:And once again the market has taken a dive.
Govts want inflation. They need inflation to deflate their debt. So it will happen.
Just not like the 70s, I hope.
The only good thing about the 70s was hot pants.

V8

2008 UK debt was around £500Bn and costing around 5%/year to service.
Since then there's been 36% inflation so in inflation adjusted terms = 680Bn which at 5% = £34Bn/year interest payment cost in 2021 money (inflation adjusted) terms. More recently the debt is around £2.1T and costing 2%/year, but the BoE has printed £900Bn and in effect bought up a large chunk of that debt (older higher cost to service Gilts) and returns all interest paid on those gilts back to the treasury. So more like £1.2T debt costing 2% to service = £24Bn/year interest payment costs. The repayments (gilts maturing) occur over many years/decades, and as each matures so another might be issued (debt rolled) or repaid.

High inflation = higher interest rates = higher cost to roll Gilts is less desirable than if inflation/interest rates remain low, with mildly negative real yields.

As in how Covid/lockdown saw a dip in inflation/GDP, so coming out of Covid might see a peak in inflation/GDP, perhaps 4% before inflation drops back down to more around 2% BoE remit target level. And where interest rates also rise from current very low levels back to 2% type levels.


Sorry, since the 2008 UK debt was mostly at fixed interest rates rather than indexed gilts the 36% inflation since then will have inflated the debt away rather than increased it in line with inflation. A large amount will also by now have been rolled over at much much lower interest rates (the governments since then have also been successfully replacing short term debt with longer term debt so even if interest rates were to rise in the near future it wouldn't affect the low interest rates being paid on that debt for quite sometime).

I scaled up the 500Bn of 2008 debt for inflation as a comparison of the amount of debt back then in present day money terms. With the BoE having QE'd 900Bn so far, that's like it having printed to buy up all of that old debt (and more), so eliminated older higher cost (yield) gilts, whilst the Treasury issued new Gilts that pay lower yields and as you say stretched out even further in time. So on a service basis I was striving to indicate that the current 'large' debt costs no more, likely less than it cost to service the debt back in 2008 (pre financial crisis). There is still the issue that that lager capital debt will have to be either paid down or rolled, but inflation erodes that.

Somewhat like 600Bn costing 5% (yields) versus twice as much, 1200Bn, costing 2% ... and its cheaper to service the latter (30Bn interest payments versus 24Bn). Where the BoE in effect printed money to buy all of that 600Bn of gilts and returns all of the interest the treasury pays on those gilts back to the treasury (little different to having torn up those gilts).

Higher/rising interest rates would just make it more subjective of a case of whether debt should be expanded or not. When you can borrow for relatively little that's a easy choice. If interest rates/yields were higher then the treasury might opt to increase taxes rather than borrow. All pretty much business as usual, except where QE/QT might be employed instead of revising interest rates. And excepting that the chancellor will tend to use the 'large £2.1T debt' as a excuse for tightening spending/raising taxes (smoke and mirrors).

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Re: Is rising inflation looming?

#432699

Postby murraypaul » August 5th, 2021, 4:10 pm

BOE sees inflation reaching 4% this year.

https://www.bbc.co.uk/news/business-58098118
The Bank of England has warned inflation will rise to 4% this year, higher than previously forecast and double the 2% rate it aims for.

But the Bank insisted surging prices were temporary and inflation would fall to its target rate in the medium term.

This prompted the Bank's Monetary Policy Committee to keep interest rates on hold at a record 0.1% on Thursday.

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Re: Is rising inflation looming?

#432704

Postby monabri » August 5th, 2021, 4:27 pm

88V8 wrote:
Itsallaguess wrote:The UK inflation rate rose to 1.5% in the 12 months to April, up from 0.7% in March, official figures show.


The only good thing about the 70s was hot pants.

V8


Never could get them in my size, though.... :lol:

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Re: Is rising inflation looming?

#432783

Postby GoSeigen » August 5th, 2021, 9:27 pm

murraypaul wrote:BOE sees inflation reaching 4% this year.


GoSeigen sees inflation reaching 4% this year:

viewtopic.php?p=423842#p423842

;-)

GS

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Re: Is rising inflation looming?

#434863

Postby TheMotorcycleBoy » August 15th, 2021, 11:28 am

Stealth inflation
Certainly seeing "inflation in disguise" right now. Mel and I took the 16 yr old and her mate out for slap up pub grub yesterday (Greene King food pub, Caldecotte Mill in MK). The pricing didn't look much different than usual, but we'd all agree that the portion sizes were noticeably smaller. I could see a lot more crockery through the food when the meals first arrived, and assuming my usual "dustbin role" of helping the girls finish their meals (sorry I guess I've inherited this trait from the old man, who was a war baby) wasn't amazingly taxing. All the puddings looked a bit smaller than usual :( It was still a nice meal out, (service was great) but there's definitely someone out there cutting costs in the face of rising prices.

Matt

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Re: Is rising inflation looming?

#434877

Postby quelquod » August 15th, 2021, 12:02 pm

A few random points I’ve noted. Our hairdresser has put their prices up by an average of 30% (due to cost of Covid measures and reduction in number of permitted seats). Gas/electricity up from £135 to £179 as fixed deal ends. B&Q compost and bark prices up by approx. 20% this year. Garden centre plant prices up by around 50-100%. Average weekly food shopping bill at ASDA up by around 12%. Then the steady rise in diesel price and so forth. It’s not hard to see inflation going over the 4% this year. Even my local golf course has effectively raised its price (to me) by 20% or so by scrapping the cheaper Monday-Friday only ‘seniors’ subscription!

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Re: Is rising inflation looming?

#434885

Postby richfool » August 15th, 2021, 12:28 pm

Yes, I too see lots of prices rises, though mostly in the hotel and hospitality industry.

I live in a holiday resort town.
2 nights self-catering in a 2 bed mid terraced town house holiday home in November - £600.
4 nights in another with sea view, (both 2 beds for 4 people) in October - £1000

Crab sandwiches 2 summers ago £5.50 - £6.50. Now £8.70!

My friendly coffee shop/wine bar, 18 months ago was £2.60 for a latte, then earlier this summer re-opened at £2.75 and now a couple of weeks later up to £2.85.

Same place, speciality gins with tonic £6.00 - 2 months ago. Then 2 weeks ago, I was charged £6.60 plus a 10% service charge (sitting outside). I shan't be returning.

I can appreciate that the hospitality industry is seeking to recover some of the ground lost during the covid lockdown, but to me there is a limit, I consider these prices and tactics as unacceptable and vote accordingly with my feet.

Regarding inflation and interest rates, I was listening to a Kitco interview on YouTube yesterday. The gist was that, despite rising inflation, the Fed would be inhibited from raising interest rates because it would result in a stock market crash. It might raise them by 0.25 points, but that would then unnerve markets and cause equities to fall. It can't raise them by much because of the huge debts that it would have to service at higher interest rates and that slowly markets would realise that and equities would fall and gold recover again. The Fed (and presumably other central banks) has little choice but to try and "inflate" away the huge debts.

I just found the link: https://youtu.be/eHH6CZo1JnA

In another interview the "expert" was advising avoid US and big name tech and growth stocks and seek out alternative assets and value stocks.

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Re: Is rising inflation looming?

#435036

Postby TheMotorcycleBoy » August 16th, 2021, 7:56 am

richfool wrote:Regarding inflation and interest rates, I was listening to a Kitco interview on YouTube yesterday. The gist was that, despite rising inflation, the Fed would be inhibited from raising interest rates because it would result in a stock market crash. It might raise them by 0.25 points, but that would then unnerve markets and cause equities to fall. It can't raise them by much because of the huge debts that it would have to service at higher interest rates and that slowly markets would realise that and equities would fall and gold recover again. The Fed (and presumably other central banks) has little choice but to try and "inflate" away the huge debts.

I just found the link: https://youtu.be/eHH6CZo1JnA

Thanks for your thoughts and the link, Rich

I have read similar views, i.e. that CBs are trapped into maintenance of close-to-zero rates.

In another interview the "expert" was advising avoid US and big name tech and growth stocks and seek out alternative assets and value stocks.

Which of course is contrary to the narrative of perpetually low rates.

I'm wondering now if fear of inflation is the motivation behind the strong recent recovery of bitcoin. What's the conclusion for us equity investors? Presumably keep buying, since we lose out holding cash?

Matt

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Re: Is rising inflation looming?

#435639

Postby murraypaul » August 18th, 2021, 12:06 pm

https://www.bbc.co.uk/news/uk-58254000
The UK inflation rate fell to 2% in the year to July as the economy continued to reopen from Covid-19 restrictions.

The Consumer Prices Index (CPI) measure of inflation dipped from 2.5% in the year to June, the highest level for nearly three years, the Office for National Statistics (ONS) said.

The rate fell to the Bank of England's 2% inflation target, after being higher for two months in a row.

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Re: Is rising inflation looming?

#435665

Postby richfool » August 18th, 2021, 1:32 pm

Further extracts from that same BBC article, with my emphasis in bold:
Inflation pressures

Yael Selfin, chief economist at KPMG UK, said the rate dip "masks the strength of inflationary pressures currently within the UK economy".

"We expect inflation to accelerate further during the rest of this year, rising significantly above the Bank of England's 2% target, as supply chains remain under strain faced with a strong rebound in demand,
" she added.

The Retail Prices Index
(RPI), a separate measure of inflation, increased to 3.8%. The number in July is typically used to calculate rises in regulated rail fares.

However, the government said no decision had been made on national fares, with a spokesman stating it is "considering a variety of options".

Inflation came in lower than expected, bang on the Bank of England's target of 2%, thanks to a fall in the price of clothing.

But some of the comparisons reflect last year's reopening trends, for example in July 2020 clothes prices did not fall, as is usual during the sales.

Some prices are difficult to calculate, such as package holidays.

Other prices are still surging, such as the used car market, when in July the 12-month inflation rate was 14%, reflecting shortages of new cars due to difficulties in semiconductor production. Petrol prices are well up on a year ago too.

So the broad story is that this is a pause for breath as inflation marches towards 4% this year.

But the fact it has dipped provides more support for the majority of Bank of England decision makers on the Monetary Policy Committee who believe that the anticipated rise will be temporary and does not need an immediate response, in order to contain it.

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Re: Is rising inflation looming?

#437358

Postby TheMotorcycleBoy » August 25th, 2021, 4:35 pm

richfool wrote:Regarding inflation and interest rates, I was listening to a Kitco interview on YouTube yesterday. The gist was that, despite rising inflation, the Fed would be inhibited from raising interest rates because it would result in a stock market crash. It might raise them by 0.25 points, but that would then unnerve markets and cause equities to fall. It can't raise them by much because of the huge debts that it would have to service at higher interest rates and that slowly markets would realise that and equities would fall and gold recover again. The Fed (and presumably other central banks) has little choice but to try and "inflate" away the huge debts.

Although letting inflation rise, in order to "inflate" away debts may sound like a good idea in the near term, it's going to be problematic for governments long term because future spending will be more expensive, due to this inflationary effect. Hence without austerity, a bigger pile of debt will grow in order to fund public spending, continually needing to "inflate" away ever more.

Matt

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Re: Is rising inflation looming?

#437371

Postby ursaminortaur » August 25th, 2021, 5:26 pm

TheMotorcycleBoy wrote:
richfool wrote:Regarding inflation and interest rates, I was listening to a Kitco interview on YouTube yesterday. The gist was that, despite rising inflation, the Fed would be inhibited from raising interest rates because it would result in a stock market crash. It might raise them by 0.25 points, but that would then unnerve markets and cause equities to fall. It can't raise them by much because of the huge debts that it would have to service at higher interest rates and that slowly markets would realise that and equities would fall and gold recover again. The Fed (and presumably other central banks) has little choice but to try and "inflate" away the huge debts.

Although letting inflation rise, in order to "inflate" away debts may sound like a good idea in the near term, it's going to be problematic for governments long term because future spending will be more expensive, due to this inflationary effect. Hence without austerity, a bigger pile of debt will grow in order to fund public spending, continually needing to "inflate" away ever more.

Matt


UK debt is mostly fixed interest with fairly long maturities so can be inflated away for a while before needing to be rolled over at the newer higher rate needed to counteract inflation. And at least theoretically QE could be unwound, which should have a deflationary effect, as an alternative to raising interest levels to counteract inflation.
Hopefully though GDP growth will, as in the past, be higher than inflation which will mean that the debt/GDP ratio will fall anyway.

https://www.oecd.org/economy/united-kingdom-economic-snapshot/

Strong GDP growth of 7.2% in 2021 and 5.5% in 2022 is projected as a large share of the population is vaccinated and restrictions to economic activity are progressively eased. Growth is driven by a rebound of consumption, notably of services. GDP is expected to return to its pre-pandemic level in early 2022. However, increased border costs following the exit from the EU Single Market will continue to weigh on foreign trade. Unemployment is expected to peak at the end of 2021 as the Coronavirus Job Retention Scheme is withdrawn. Inflation is set to increase due to past increases in commodity prices and strong GDP growth, but should remain below the 2% inflation target.

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Re: Is rising inflation looming?

#437386

Postby GoSeigen » August 25th, 2021, 6:44 pm

ursaminortaur wrote:
UK debt is mostly fixed interest with fairly long maturities so can be inflated away for a while before needing to be rolled over at the newer higher rate needed to counteract inflation.


UK debt is NOT mostly fixed interest. 45% of it is funded by issuance of Central Bank reserves, this means the median maturity of UK debt is just four years. This is great for investors but pretty poor for the taxpayer. Inflation is going to be uncomfortable for the public finances unless a long-term debt issuance campaign is undertaken sometime soon (targetting of course the dumb money).


GS

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Re: Is rising inflation looming?

#437390

Postby ursaminortaur » August 25th, 2021, 7:17 pm

GoSeigen wrote:
ursaminortaur wrote:
UK debt is mostly fixed interest with fairly long maturities so can be inflated away for a while before needing to be rolled over at the newer higher rate needed to counteract inflation.


UK debt is NOT mostly fixed interest. 45% of it is funded by issuance of Central Bank reserves, this means the median maturity of UK debt is just four years. This is great for investors but pretty poor for the taxpayer. Inflation is going to be uncomfortable for the public finances unless a long-term debt issuance campaign is undertaken sometime soon (targetting of course the dumb money).


GS


The OBR says that by the end of its latest round of QE the mean maturity will have reduced to around 10 years. However in an inflationary environment QE could be unwound.

https://obr.uk/box/debt-maturity-quantitative-easing-and-interest-rate-sensitivity/

March 3rd, 2021

The average maturity of UK government bonds (known as gilts) is longer than the average maturity of government debt in most other advanced economies. But the average maturity of the net debt of the public sector as a whole (including the Bank of England) has shortened considerably since the global financial crisis. This is due to large-scale gilt purchases by the Bank of England, via its Asset Purchase Facility (APF), as part of its quantitative easing (QE) operations.
.
.
.
The Bank has not yet completed all the purchases necessary to complete its latest round of QE, but the effect of the £750 billion worth of gilts by the end of 2020 has been to reduce the effective mean maturity of the gilt stock to 11 years. By the end of the current gilt purchase programme in 2021-22, it will have fallen further to around 10 years.
.
.
.
* In a benign scenario where the increase in interest rates reflects higher economic growth, the debt stock could ultimately be lower and the primary balance more favourable, all resulting in a virtuous fiscal circle.
* But malign scenarios are possible too. If interest rates rise because investors demand a higher risk premium for some reason, this would be more likely to be accompanied by a deteriorating economic and fiscal position, resulting in a vicious fiscal circle. In such circumstances, governments can find it difficult to make the spending cuts and tax rises necessary to restore the debt trajectory to a sustainable path.

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Re: Is rising inflation looming?

#437538

Postby TheMotorcycleBoy » August 26th, 2021, 10:29 am

ursaminortaur wrote:
TheMotorcycleBoy wrote:
richfool wrote:Regarding inflation and interest rates, I was listening to a Kitco interview on YouTube yesterday. The gist was that, despite rising inflation, the Fed would be inhibited from raising interest rates because it would result in a stock market crash. It might raise them by 0.25 points, but that would then unnerve markets and cause equities to fall. It can't raise them by much because of the huge debts that it would have to service at higher interest rates and that slowly markets would realise that and equities would fall and gold recover again. The Fed (and presumably other central banks) has little choice but to try and "inflate" away the huge debts.

Although letting inflation rise, in order to "inflate" away debts may sound like a good idea in the near term, it's going to be problematic for governments long term because future spending will be more expensive, due to this inflationary effect. Hence without austerity, a bigger pile of debt will grow in order to fund public spending, continually needing to "inflate" away ever more.

Matt


UK debt is mostly fixed interest with fairly long maturities so can be inflated away for a while before needing to be rolled over at the newer higher rate needed to counteract inflation. And at least theoretically QE could be unwound, which should have a deflationary effect, as an alternative to raising interest levels to counteract inflation.

I wasn't really talking about existing debt maturities. I was attempting to critique the way that economic commentary attempts to play down inflation as a "good thing", but they ignored the fact that public spending costs (i.e. potential need for additional borrowing), will rise with inflation too. So the size of UKs debt requirement will rise.

Yes rising GDP. I don't know how much GDP ends up as tax revenue (to mitigate borrowing) so I can't really argue the toss. However, for the last decade (sorry I'm on a break so this BEEB ref. was the quickest I could find with a graph in a hurry), we've scarcely averaged 2% GDP growth.

https://www.bbc.co.uk/news/business-50373505

Lets see how accurate the forecasts turn out to be.

Matt

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Re: Is rising inflation looming?

#437563

Postby anon155742 » August 26th, 2021, 12:12 pm

TheMotorcycleBoy wrote:
ursaminortaur wrote:
TheMotorcycleBoy wrote:Although letting inflation rise, in order to "inflate" away debts may sound like a good idea in the near term, it's going to be problematic for governments long term because future spending will be more expensive, due to this inflationary effect. Hence without austerity, a bigger pile of debt will grow in order to fund public spending, continually needing to "inflate" away ever more.

Matt


UK debt is mostly fixed interest with fairly long maturities so can be inflated away for a while before needing to be rolled over at the newer higher rate needed to counteract inflation. And at least theoretically QE could be unwound, which should have a deflationary effect, as an alternative to raising interest levels to counteract inflation.

I wasn't really talking about existing debt maturities. I was attempting to critique the way that economic commentary attempts to play down inflation as a "good thing", but they ignored the fact that public spending costs (i.e. potential need for additional borrowing), will rise with inflation too. So the size of UKs debt requirement will rise.

Yes rising GDP. I don't know how much GDP ends up as tax revenue (to mitigate borrowing) so I can't really argue the toss. However, for the last decade (sorry I'm on a break so this BEEB ref. was the quickest I could find with a graph in a hurry), we've scarcely averaged 2% GDP growth.

https://www.bbc.co.uk/news/business-50373505

Lets see how accurate the forecasts turn out to be.

Matt


GDP per capita for 2020 is still at 2004 levels and probably undercounts population.

https://data.worldbank.org/indicator/NY ... cations=GB

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Re: Is rising inflation looming?

#437642

Postby dealtn » August 26th, 2021, 5:50 pm

anon155742 wrote:GDP per capita for 2020 is still at 2004 levels ...

https://data.worldbank.org/indicator/NY ... cations=GB


Probably best to make that statement in Local Currency Unit (although that diminishes your argument).

https://data.worldbank.org/indicator/NY ... cations=GB

anon155742 wrote:
...and probably undercounts population.



Do you think the population count was accurate in 2004, and the imbetween years too?

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Re: Is rising inflation looming?

#437720

Postby anon155742 » August 26th, 2021, 11:44 pm

dealtn wrote:
anon155742 wrote:GDP per capita for 2020 is still at 2004 levels ...

https://data.worldbank.org/indicator/NY ... cations=GB


Probably best to make that statement in Local Currency Unit (although that diminishes your argument).



https://data.worldbank.org/indicator/NY ... cations=GB

Probably best to make that statement in LCU at constant rates then, although that diminshes your argument and supports my initial point further.

Tell me, why would you not use a constant LCU? Constant ones are more appropriate since they actually take inflation into account.

Yes, I believe the population figure was accurate in 2004 and that it degraded since then. There is no accurate measure of immigration numbers and they are estimated via surveys. We saw that with 6 million plus EU citizens applying to remain when we were told that there were only 2.5m. Since the AC10 ascension there have been very high levels. The Home Office predicted 5000 to 13,000 per year from the AC10 up to 2010. Subsequent estimates were over 700,000 over that period. Their track record is dire.

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Re: Is rising inflation looming?

#438166

Postby dealtn » August 29th, 2021, 8:54 am

anon155742 wrote:Tell me, why would you not use a constant LCU? Constant ones are more appropriate since they actually take inflation into account.



?

My suggestion was a constant one! Precisely as you suggest, "constant LCU".

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Re: Is rising inflation looming?

#438178

Postby anon155742 » August 29th, 2021, 11:05 am

dealtn wrote:
anon155742 wrote:GDP per capita for 2020 is still at 2004 levels ...

https://data.worldbank.org/indicator/NY ... cations=GB


Probably best to make that statement in Local Currency Unit (although that diminishes your argument).

https://data.worldbank.org/indicator/NY ... cations=GB

anon155742 wrote:
...and probably undercounts population.



Do you think the population count was accurate in 2004, and the imbetween years too?
dealtn wrote:
anon155742 wrote:Tell me, why would you not use a constant LCU? Constant ones are more appropriate since they actually take inflation into account.



?

My suggestion was a constant one! Precisely as you suggest, "constant LCU".


No it was not. Click your own link again and you will see the title: GDP per capita (current LCU).

Constant LCU shows that we are, like I said in my initial post, back to our 2004 levels of GDP per capita.


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