Is rising inflation looming?

[GoSeigen]

This is not the 1970s redux.

1930s/40s maybe...

GS

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

This is what I wrote two years ago. Call me an idiot if you like...

viewtopic.php?p=295513#p296654

As evidence read The Stock Market - 50 Years of Capitalism at Work by John Littlewood.

GS

[GoSeigen]

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

The world moves in cycles, not half-cycles.

You cannot go overnight from 1.x% long term yields to 10%+ yields. Do fools understand what that would mean for asset prices, i.e. capital financing?

To suggest it is simply absurd.

I've done this before, maybe you didn't notice, but anyway... Some reasons I know it's not the 70s.
1. Yields have just been sub 2%
2. Nothing is owned by the government.
3. Corollary: nothing has been nationalised.
3. There are no strikes.
4. There isn't a population boom.
5. There isn't a young workforce.
6. Politics is decided by the geriatric class from which this board's readership is drawn , not the young radical protesting classes of the 60s and 70s.
7. The cycle is at the end of a long decline in yields, not at the end of a long rise.
8. Debt levels are in the middle of a long rise, not halfway through their decline.
9. The economy has been through a long slump in growth levels, not a couple of decades of surging growth.
10. Labour's share of GDP is at historical lows not historical highs.
11. Market Cap:GDP is approaching its highs, not its lows.

Do you need more or can I stop there?


GS

[ursaminortaur]

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

The world moves in cycles, not half-cycles.

You cannot go overnight from 1.x% long term yields to 10%+ yields. Do fools understand what that would mean for asset prices, i.e. capital financing?

To suggest it is simply absurd.

I've done this before, maybe you didn't notice, but anyway... Some reasons I know it's not the 70s.
1. Yields have just been sub 2%
2. Nothing is owned by the government.
3. Corollary: nothing has been nationalised.
3. There are no strikes.

Well, apart from the upcoming rail strikes and the fact that other groups are starting to talk about striking.

https://www.ft.com/content/7266de82-6510-4b10-a655-d57ab21335ec

Unison warns of public-sector strikes unless pay deals match cost of living

[Tara]

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

It is still true though.

Interest rates have been kept far too low and for far too long. The main beneficiaries have been billionaires and the rich, and the price is now being paid by the very poorest people in society through soaring inflation. Very few of the rich will be willing to admit the ugly truth though.

[tjh290633]

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

It is still true though.

Interest rates have been kept far too low and for far too long. The main beneficiaries have been billionaires and the rich, and the price is now being paid by the very poorest people in society through soaring inflation. Very few of the rich will be willing to admit the ugly truth though.

The thing that strikes me about low interest rates, is that they depress the value of the currency. Currently sterling is at a low value, against both USD and EUR. Had it never fallen below 2.5% the situation might be different today. I remember in the mid 1980s that the exchange rate was $2.40 =£1, and in the earlier years of this century, €1 = 70p. Don't forget the effect of interest rates on savings accounts and annuity rates, regardless of mortgages.

TJH

[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

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.

Builders are always booked up!

You could quite easily argue, quite correctly, that there is a supply shortage of them

Matt

[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.

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.

Hi Tara,

I've no mortgage, own a single home, have no cars on finance, no outstanding credit cards, and money in a saving account earning just over 1.15% interest. I've absolutely zero interest, pardoning the pun, in keeping rates low! The savings in my Marcus account would certainly do far better if rates were higher.

I really wish it was as simple as having the CBs raise rates to dispel this horrendous bout of inflation, but none of the FR, ECB, BoE etc. can alleviate the supply shortages I referred to in my earlier reply to you.

Matt

[GoSeigen]

3. There are no strikes.

Well, apart from the upcoming rail strikes and the fact that other groups are starting to talk about striking.

https://www.ft.com/content/7266de82-6510-4b10-a655-d57ab21335ec

Unison warns of public-sector strikes unless pay deals match cost of living

Pardon me but I was trying to focus on the big picture, not trivialities.

https://www.theguardian.com/uk-news/2018/may/30/strikes-in-uk-fall-to-lowest-level-since-records-began-in-1893
https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/articles/thehistoryofstrikesintheuk/2015-09-21

GS

[GoSeigen]

The thing that strikes me about low interest rates, is that they depress the value of the currency. Currently sterling is at a low value, against both USD and EUR.

You might want to rethink it then, because both the US and Eurozone have had unbelievably low interest rates for years.

GS

[ursaminortaur]

3. There are no strikes.

Well, apart from the upcoming rail strikes and the fact that other groups are starting to talk about striking.

https://www.ft.com/content/7266de82-6510-4b10-a655-d57ab21335ec

Unison warns of public-sector strikes unless pay deals match cost of living

Pardon me but I was trying to focus on the big picture, not trivialities.

https://www.theguardian.com/uk-news/2018/may/30/strikes-in-uk-fall-to-lowest-level-since-records-began-in-1893
https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/articles/thehistoryofstrikesintheuk/2015-09-21

GS

By looking back to 2015 and 2018 ? How is that relevant ? What matters is whether we have strikes in the near future and it looks like that could well happen and since those strikes are over pay and the cost of living it could well lead to wage inflation on top of that being caused by supply-side issues.

[Bubblesofearth]

The world moves in cycles, not half-cycles.


You cannot go overnight from 1.x% long term yields to 10%+ yields. Do fools understand what that would mean for asset prices, i.e. capital financing?

To suggest it is simply absurd.

I've done this before, maybe you didn't notice, but anyway... Some reasons I know it's not the 70s.
1. Yields have just been sub 2%
2. Nothing is owned by the government.
3. Corollary: nothing has been nationalised.
3. There are no strikes.
4. There isn't a population boom.
5. There isn't a young workforce.
6. Politics is decided by the geriatric class from which this board's readership is drawn , not the young radical protesting classes of the 60s and 70s.
7. The cycle is at the end of a long decline in yields, not at the end of a long rise.
8. Debt levels are in the middle of a long rise, not halfway through their decline.
9. The economy has been through a long slump in growth levels, not a couple of decades of surging growth.
10. Labour's share of GDP is at historical lows not historical highs.
11. Market Cap:GDP is approaching its highs, not its lows.

Do you need more or can I stop there?


GS

We've had a number of sharp dislocations to the economic cycle caused by a GFC followed by a pandemic followed by a resource-impactful war. We've had massive money printing, soaring raw material costs and people desperate to get back to some sort of living. All against a backdrop of policies designed to encourage inflation (ref benefits/wages)

Yields soared during the years of the early 70's and there's no a priori reason they cannot do so again.

Population growth has been as robust in recent years as it was in the 70's.

I see nothing to suggest debt levels are half way to some unimaginable ceiling. They are already at nose-bleed levels thanks to record low interest rates.

We've already seen evidence of strikes increasing and even without these wage demands will be back-stopped by the inflation-linked minimum wage, pensions and benefits. Plus a bit of free money to help ease energy bills.

History rarely repeats itself exactly. The inflation we are seeing may well be against a different economic backdrop than that seen in the 70's but the forces for it seem pretty well aligned IMO.

BoE

[GoSeigen]

3. There are no strikes.

Well, apart from the upcoming rail strikes and the fact that other groups are starting to talk about striking.

https://www.ft.com/content/7266de82-6510-4b10-a655-d57ab21335ec

Unison warns of public-sector strikes unless pay deals match cost of living

Pardon me but I was trying to focus on the big picture, not trivialities.

https://www.theguardian.com/uk-news/2018/may/30/strikes-in-uk-fall-to-lowest-level-since-records-began-in-1893
https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/articles/thehistoryofstrikesintheuk/2015-09-21

GS

By looking back to 2015 and 2018 ? How is that relevant ? What matters is whether we have strikes in the near future and it looks like that could well happen and since those strikes are over pay and the cost of living it could well lead to wage inflation on top of that being caused by supply-side issues.

2018 was four years ago. 2015 seven years ago. We're talking about the difference in conditions in periods 30-40 years apart. Even if something material has changed in those four years, and I doubt it has, that doesn't move things on 30 years. And that was one factor out of the 11 listed, and one that I doubt anyone seriously quibbles with. The seventies were riddled with strikes as the chart I linked to clearly shows. The thirties were not.


GS

[GoSeigen]

3. There are no strikes.

Well, apart from the upcoming rail strikes and the fact that other groups are starting to talk about striking.

https://www.ft.com/content/7266de82-6510-4b10-a655-d57ab21335ec

Unison warns of public-sector strikes unless pay deals match cost of living

Pardon me but I was trying to focus on the big picture, not trivialities.

https://www.theguardian.com/uk-news/2018/may/30/strikes-in-uk-fall-to-lowest-level-since-records-began-in-1893
https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/articles/thehistoryofstrikesintheuk/2015-09-21

GS

By looking back to 2015 and 2018 ? How is that relevant

Incidentally, I also wasn't looking back to 2015 and 2018 -- but to 1893 and 1891 respectively in the two links... maybe take another look?

GS

[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.

Hi Tara,

I've no mortgage, own a single home, have no cars on finance, no outstanding credit cards, and money in a saving account earning just over 1.15% interest. I've absolutely zero interest, pardoning the pun, in keeping rates low! The savings in my Marcus account would certainly do far better if rates were higher.

I really wish it was as simple as having the CBs raise rates to dispel this horrendous bout of inflation, but none of the FR, ECB, BoE etc. can alleviate the supply shortages I referred to in my earlier reply to you.

Matt

So you own a house and as a property owner you probably would not like to see significantly higher interest rates as you know it would probably lead to significantly lower house prices.

If this “horrendous” inflation could actually be cured by 10% interest rates, you would probably not want it to be cured.

And so most of the billionaires, and the richest 1%, and the richest 10%, and most likely yourself and others here, will be quite content to see the very poorest people in society take all of the real pain of inflation.

[GoSeigen]

We've had a number of sharp dislocations to the economic cycle caused by a GFC followed by a pandemic followed by a resource-impactful war. We've had massive money printing, soaring raw material costs and people desperate to get back to some sort of living. All against a backdrop of policies designed to encourage inflation (ref benefits/wages)

BoE/Lookingforclues has been saying this since at least 2009. One day he might be right!

Yields soared during the years of the early 70's and there's no a priori reason they cannot do so again.

Wrong. In the 30s consols were issued at 2.5%. Long gilt yields traded between 5 and 10% in the late 40s/50s, in the UK at least. Two more decades of steady rise before they went above 10% sustainably. 70s inflation absolutely did not appear out of nowhere and yields took almost 40 years to rise from 2.5% to over 10%. Similar for the US.

Population growth has been as robust in recent years as it was in the 70's.

Nonsense. https://commons.wikimedia.org/wiki/File:World_population_growth_rate_1950%E2%80%932050.svg

I see nothing to suggest debt levels are half way to some unimaginable ceiling. They are already at nose-bleed levels thanks to record low interest rates.

Here it is. Eyes need to be open! https://www.economicshelp.org/wp-content/uploads/2011/08/us-debt-held-by-public-1790-2021-labels-2048x1311.jpg.webp
Debt rising now, as in 1930s/40s-- not falling as in 1970s.

We've already seen evidence of strikes increasing and even without these wage demands will be back-stopped by the inflation-linked minimum wage, pensions and benefits. Plus a bit of free money to help ease energy bills.

Wonderful. Give it another decade or two and they may be frequent enough to cause enough supply disruption and force sufficient wage increases to result in some sustained 10%-plus inflation.

History rarely repeats itself exactly. The inflation we are seeing may well be against a different economic backdrop than that seen in the 70's but the forces for it seem pretty well aligned IMO.

Well, at least there's agreement that the backdrop is completely different. That doesn't nail the argument of course; it is also necessary to see how inflation is permitted by the one environment and suppressed by the other. Since the evidence above and the outcome since 2009 (during which gilt yields have fallen from 5% to virtually zero) has been insufficient to change BoE's mind I doubt anything I say now will help.


GS

[ursaminortaur]

3. There are no strikes.

Well, apart from the upcoming rail strikes and the fact that other groups are starting to talk about striking.

https://www.ft.com/content/7266de82-6510-4b10-a655-d57ab21335ec

Unison warns of public-sector strikes unless pay deals match cost of living

Pardon me but I was trying to focus on the big picture, not trivialities.

https://www.theguardian.com/uk-news/2018/may/30/strikes-in-uk-fall-to-lowest-level-since-records-began-in-1893
https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/articles/thehistoryofstrikesintheuk/2015-09-21

GS

By looking back to 2015 and 2018 ? How is that relevant ? What matters is whether we have strikes in the near future and it looks like that could well happen and since those strikes are over pay and the cost of living it could well lead to wage inflation on top of that being caused by supply-side issues.

2018 was four years ago. 2015 seven years ago. We're talking about the difference in conditions in periods 30-40 years apart. Even if something material has changed in those four years, and I doubt it has, that doesn't move things on 30 years. And that was one factor out of the 11 listed, and one that I doubt anyone seriously quibbles with. The seventies were riddled with strikes as the chart I linked to clearly shows. The thirties were not.


GS

If you had said "vastly fewer strikes" I wouldn't have bothered posting but since you saId "No Strikes" I felt it warranted correction with rail strikes due to take place and other talk of strikes. I'm sorry you seem to have taken umbrage at that.

[tjh290633]

The thing that strikes me about low interest rates, is that they depress the value of the currency. Currently sterling is at a low value, against both USD and EUR.

You might want to rethink it then, because both the US and Eurozone have had unbelievably low interest rates for years.

GS

February 2008, BofE base rate was 5.25%, after which it began to fall, reaching 0.5% in March 2009.

Until that point, interest rates had been at sensible levels. I see they got up to 14.875% in October 1989.

TJH

[Bubblesofearth]

BoE/Lookingforclues has been saying this since at least 2009. One day he might be right!

Looks like now. Although we've had financial repression since the GFC so in many ways inflation has been a problem for more than a decade. Which kind of addresses your later point of inflation not appearing out of nowhere. The severely negative yield on inflation-linked gilts supports the thesis of higher inflation expectations.

Nonsense. https://commons.wikimedia.org/wiki/File:World_population_growth_rate_1950%E2%80%932050.svg

I assumed we were talking about the UK;

https://www.statista.com/statistics/281 ... opulation/

Here it is. Eyes need to be open! https://www.economicshelp.org/wp-content/uploads/2011/08/us-debt-held-by-public-1790-2021-labels-2048x1311.jpg.webp
Debt rising now, as in 1930s/40s-- not falling as in 1970s.

UK household debt has come off highs and been off them for some years. It is household debt that restricts household spending;

https://www.nomuraconnects.com/focused- ... /#images-1



BoE/LFC

[GoSeigen]

If you had said "vastly fewer strikes" I wouldn't have bothered posting but since you saId "No Strikes" I felt it warranted correction with rail strikes due to take place and other talk of strikes. I'm sorry you seem to have taken umbrage at that.

I'm sorry you took umbrage at my use of "No strikes". Of course there are occasionally strikes. It's just that they are negligible compared to the 70s. I'm trying to identify roughly where we are in the cycle here which doesn't require documenting the evidence to high precision. "Is it low and rising?" is sufficient for my purposes.

Similarly, for my fellow pedants: "in the middle of" can mean "in the course of doing something" as in "I'm in the middle of a phone call". It doesn't have to mean that there remain precisely 50% of my words still to be uttered before reaching some unimaginable end of the phone call!


By all means post your own data to show how close current conditions are to the 1970s and how removed from the 30s, but let's not quibble about irrelevant minutiae -- I'll say up front I am willing to concede those details while defending the substantive point.


GS

[GoSeigen]

BoE/Lookingforclues has been saying this since at least 2009. One day he might be right!

Looks like now. Although we've had financial repression since the GFC so in many ways inflation has been a problem for more than a decade. Which kind of addresses your later point of inflation not appearing out of nowhere.

This is sophistry. Yes inflation has been a problem: it has been non-existent and resistant to all efforts to raise it to a mere 2%.

And "Looks like now" is begging the question. Let's give it a couple of years to see what happens, since we are dealing with predictions here...

Nonsense. https://commons.wikimedia.org/wiki/File:World_population_growth_rate_1950%E2%80%932050.svg

I assumed we were talking about the UK;

https://www.statista.com/statistics/281 ... opulation/

No, I certainly am not arguing that world economic conditions are driven by the UK with 3.5% of world GDP!! The UK is dragged along by the US, China, Japan and EU so will of course reflect what is happening there. There is an entire planet outside the borders of the UK...

Besides, as a linear chart of a naturally compounding quantity the chart is hard to interpret. How about posting a semi-log chart or one showing annual population change, then show how it is evidence that today is more like the 70s than the 30s (for the UK only with 0.75% of world population)?

Here it is. Eyes need to be open! https://www.economicshelp.org/wp-content/uploads/2011/08/us-debt-held-by-public-1790-2021-labels-2048x1311.jpg.webp
Debt rising now, as in 1930s/40s-- not falling as in 1970s.

UK household debt has come off highs and been off them for some years. It is household debt that restricts household spending;

https://www.nomuraconnects.com/focused- ... /#images-1

Agree about the spending bit. But where is the control? The data in the Nomura article doesn't even cover the 70s, let alone the 30s. My exercise here is to compare in some rough scientific manner, not just pull statistics out of context and try to interpret them. What was household debt doing in the 70s? What what was it doing in the 30s? Which is more relevant to today's situation? And why the focus on the UK? Inflation, like the GFC, is a worldwide phenomenon, not isolated to one country.


This to and fro distracts from the main point, which is that this is not 1970s redux: economic conditions are closer to the 1930s than the 1970s.

GS