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RPI to 6% !

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BT63
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Re: RPI to 6% !

#466767

Postby BT63 » December 17th, 2021, 1:20 pm

GoSeigen wrote:
BT63 wrote:
scrumpyjack wrote:Andrew Bailey sadly is woefully inadequate in his job.


Are there any central bankers who seem competent?
I can't think of any for decades.
They all apply too much stimulus for too long, which leads to distortions which causes boom and bust cycles about once per decade.


This point has been debated many times. Competence is one thing, but the idea that central bankers' policy has been too loose is a logical error IMO. Over the period discussed the mandate of CBs was to bring down inflation by applying tight monetary policy. This they succeeded in doing. One must therefore interpret monetary policy as having been tight, not loose, else inflation would have risen (or stayed the same) rather than falling. In fact policy was so tight that inflation was driven to practically zero or negative at times; this produced a problem for Central Banks (but recently not decades ago) where they had to reverse their strategy and try to raise inflation back to their targets. So yes, perhaps policy is loose or even too loose now, but that is a recent phenomenon.


GS


Globalisation and technological advances helped with the disinflationary forces.

It should never be the case that lending money is a loss-maker in real terms. Lenders need to be rewarded for their capital being tied up for a period of time and for the risk that some or all of it might not be paid back due to defaults.

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Re: RPI to 6% !

#466768

Postby MDW1954 » December 17th, 2021, 1:22 pm

I have some sympathy for Bailey, but not much.

Where I think he made his biggest mistake was to basically deny that inflation at 4% or over was going to occur. Back in the summer, I thought that this was very likely, and said so. A month or so later, I had adjusted my expectations to a level of 6% or so, and again said so. All very Bayesian: that was where the data was pointing.

Where I have some sympathy for him is in two areas. First, he doesn't make the decision in isolation: there are other voices on the MPC. And second, interest rates are a fairly blunt tool with which to address exogenous shocks.

My view is that where inflation goes from here is difficult to call. A rise of 0.15 percentage points might be thought of as laughable. And if you're of that school of thought, then >7% seems all too likely. But... fiscal drag (think April's tax rises) will exert deflationary pressures, adding to that. The big unknown is what will happen to wages. And just yesterday, I was talking to a small business owner who is basically outbidding other employers to attract (and retain) staff. Their lament: where have all the Europeans gone?

But there, we digress...

MDW1954

BT63
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Re: RPI to 6% !

#466775

Postby BT63 » December 17th, 2021, 1:46 pm

MDW1954 wrote:I have some sympathy for Bailey, but not much.
Where I think he made his biggest mistake was to basically deny that inflation at 4% or over was going to occur.


Asset price inflation - especially houses - has been mostly driven by cheap money. It's not just shop prices that can rise as a result of too-loose monetary policy.
A lot of former cash savers have probably put their money into second homes or buy-to-let because they didn't want the 'risk' of stock markets but didn't want below-inflation returns on their savings.
Certainly as time went on during the 1990s and rates went down, I was gradually persuaded to keep less in savings and put more into stock markets.

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Re: RPI to 6% !

#466778

Postby RockRabbit » December 17th, 2021, 1:56 pm

Germany's producer prices jumped by 19.2 percent from a year earlier in November 2021.

Either consumer prices will rise further or profits will be squeezed.

https://tradingeconomics.com/germany/pr ... ces-change

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Re: RPI to 6% !

#466788

Postby Mike4 » December 17th, 2021, 2:20 pm

RockRabbit wrote:Germany's producer prices jumped by 19.2 percent from a year earlier in November 2021.

Either consumer prices will rise further or profits will be squeezed.

https://tradingeconomics.com/germany/pr ... ces-change


This is exactly the sort of statistic that has been leading me to expect UK inflation to be north of 10% in the next few months, or perhaps a year. Everywhere I look, I find anecdotes of large input cost increases.

In my own industry copper tube for example is said to have doubled in price recently (not that I buy it myself). Gas boiler spares I would say are in general a good 10% more expensive than they were this time last year. And all this is without the inherent wage inflation caused by lack of truck drivers, fruit pickers, slaughterhouse workers and other low cost labour no longer freely available from abroad.

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Re: RPI to 6% !

#466794

Postby GeoffF100 » December 17th, 2021, 2:29 pm

Mike4 wrote: And all this is without the inherent wage inflation caused by lack of truck drivers, fruit pickers, slaughterhouse workers and other low cost labour no longer freely available from abroad.

They were here legally. There is no reason the believe that they were paid less than the locals. The locals are not willing to do some of those jobs in sufficient numbers, and we have a shortage of fit and capable people overall. You cannot train truck drivers (for example) overnight. We have a labour shortage, not a shortage of cheap labour.

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Re: RPI to 6% !

#466797

Postby Adamski » December 17th, 2021, 2:33 pm

The energy price cap is going up 40% in April. Going to be big news well into next year.

One thing that will keep inflation slightly less is when prices go up people start shopping around and change spending habits. Not so great for some businesses but others do better. Shopping at Aldi instead of meals out. Holidays in UK instead of Provence. Home improvements instead of pricey house move.

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Re: RPI to 6% !

#466803

Postby Alaric » December 17th, 2021, 3:06 pm

Adamski wrote:One thing that will keep inflation slightly less is when prices go up people start shopping around and change spending habits.


It's an implicit assumption in the CPI calculations that this happens. The RPI on the other hand assumes people carry on spending regardless, at least until the index contents are reviewed. That's sort of the reason why RPI exceeds CPI.

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Re: RPI to 6% !

#466825

Postby stevensfo » December 17th, 2021, 3:57 pm

Alaric wrote:
Adamski wrote:One thing that will keep inflation slightly less is when prices go up people start shopping around and change spending habits.


It's an implicit assumption in the CPI calculations that this happens. The RPI on the other hand assumes people carry on spending regardless, at least until the index contents are reviewed. That's sort of the reason why RPI exceeds CPI.


That's one of the reasons why I dislike the CPI. I prefer to have a measure of how much items go up, NOT how people respond to the increase. That's a completely different subject.

Okay, silly analogy, but if the whole population dies of hypothermia or starves to death, the government can claim that the CPI rate was actually zero, because they didn't spend more.

Seeing that the CPIH is lower than the CPI and RPI, how long till a new measure is announced, to prove that prices are going down? 8-)


Steve

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Re: RPI to 6% !

#466828

Postby dealtn » December 17th, 2021, 4:13 pm

stevensfo wrote:
Alaric wrote:
Adamski wrote:One thing that will keep inflation slightly less is when prices go up people start shopping around and change spending habits.


It's an implicit assumption in the CPI calculations that this happens. The RPI on the other hand assumes people carry on spending regardless, at least until the index contents are reviewed. That's sort of the reason why RPI exceeds CPI.


That's one of the reasons why I dislike the CPI. I prefer to have a measure of how much items go up, NOT how people respond to the increase. That's a completely different subject.



Agreed, they are different. Although the second is inflation not the first! Inflation is a macroeconomic measure that takes into account not just changes in prices, but changes in quantities transacted.

If prices rise, or goods are no longer available, it is appropriate to incorporate how people adjust to that, either by buying fewer, or substituting to alternatives. That's why I (and economists generally) prefer CPI (or other) measures to the blunt RPI.

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Re: RPI to 6% !

#466829

Postby Alaric » December 17th, 2021, 4:19 pm

dealtn wrote:That's why I (and economists generally) prefer CPI (or other) measures to the blunt RPI.


If however you regualarly shop for much the same goods and you find the prices increase, what do you call it? How do you quantify it?

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Re: RPI to 6% !

#466836

Postby NotSure » December 17th, 2021, 4:50 pm

Slightly cynical article on RPI vs CPI here (it's 10 years old so 'currently' is not really currently):

https://moneyweek.com/merryns-blog/the-difference-between-cpi-and-rpi-and-why-it-matters-55018

.......Look on the ONS site and you will see that "an advantageous property of the geometric mean is that it can better reflect changes in consumer spending patterns relative to changes in the price of goods and services." That may be so. But the real advantage to the government of using a geometric mean is that it is always below or equal to the arithmetic mean.

So much so that the so called "formula effect" tends to produce a difference of approximately 1% in the different indices. If the CPI were calculated as the RPI currently is, it would be about 1% higher than it is and higher than the RPI. This is why the government likes to link the payments it makes (pensions and so on) to the CPI and the payments it receives (taxes and so on) to the RPI.


Add rail fares, student loan interest rates and cigarette duties etc. to list of things linked to RPI.

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Re: RPI to 6% !

#466858

Postby ADrunkenMarcus » December 17th, 2021, 5:40 pm

Bruce Stout’s comments will be interesting!

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Re: RPI to 6% !

#466865

Postby scrumpyjack » December 17th, 2021, 5:51 pm

Mike4 wrote:
RockRabbit wrote:Germany's producer prices jumped by 19.2 percent from a year earlier in November 2021.

Either consumer prices will rise further or profits will be squeezed.

https://tradingeconomics.com/germany/pr ... ces-change


This is exactly the sort of statistic that has been leading me to expect UK inflation to be north of 10% in the next few months, or perhaps a year. Everywhere I look, I find anecdotes of large input cost increases.

In my own industry copper tube for example is said to have doubled in price recently (not that I buy it myself). Gas boiler spares I would say are in general a good 10% more expensive than they were this time last year. And all this is without the inherent wage inflation caused by lack of truck drivers, fruit pickers, slaughterhouse workers and other low cost labour no longer freely available from abroad.


Indeed. What set off the huge inflation in the '70s was the cycle of higher prices > higher wages > higher prices. It seems to me that we are very near the point where that is going to happen again. The governor of the bank of England has to be a figure with gravitas, commanding respect etc. Not someone promoted on the Peter principle to his own level of incompetence. I have not really followed Bailey's actions as governor but he was a disaster in his previous roles and could not inspire anyone with confidence. Obviously Covid has been a once in a hundred years event but to me he has not shown that he is focussed on also preserving the value of our currency.

I have started reducing my cash holdings significantly and have increased some equity holdings a couple of weeks ago. I don't think GBP is a good place to hold your wealth over the next few years! The 1970 pound has lost about 97% of its purchasing power (yes it now costs a pound to buy what 3p would buy then), so Weimar here we come (or already are!).

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Re: RPI to 6% !

#466876

Postby dealtn » December 17th, 2021, 6:18 pm

Alaric wrote:
dealtn wrote:That's why I (and economists generally) prefer CPI (or other) measures to the blunt RPI.


If however you regualarly shop for much the same goods and you find the prices increase, what do you call it? How do you quantify it?


Rising Prices. I don't need to quantify it.

If I wanted (good forbid) to calculate my personal inflation number I would analyse my spending across two periods, make adjustments for income changes, changes in my basket of goods and services (whether by my choice or unavailability), further adjust those to discover which had income and which had substitution effects, which need adjusting due to factors such as technological change and productivity improvements, and annualise those periods, whilst applying a geometric averaging mathematical technique.

Why anyone would want to do that would be beyond me, and is why macroeconomists do that at a macro level in determining economy wide inflation numbers that at the individual level can be meaningless, and a long way from being accurate. in doing so they would prefer the attributes of CPI, over the more blunt RPI.

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Re: RPI to 6% !

#466877

Postby Mike4 » December 17th, 2021, 6:21 pm

scrumpyjack wrote:
Mike4 wrote:
RockRabbit wrote:Germany's producer prices jumped by 19.2 percent from a year earlier in November 2021.

Either consumer prices will rise further or profits will be squeezed.

https://tradingeconomics.com/germany/pr ... ces-change


This is exactly the sort of statistic that has been leading me to expect UK inflation to be north of 10% in the next few months, or perhaps a year. Everywhere I look, I find anecdotes of large input cost increases.

In my own industry copper tube for example is said to have doubled in price recently (not that I buy it myself). Gas boiler spares I would say are in general a good 10% more expensive than they were this time last year. And all this is without the inherent wage inflation caused by lack of truck drivers, fruit pickers, slaughterhouse workers and other low cost labour no longer freely available from abroad.


Indeed. What set off the huge inflation in the '70s was the cycle of higher prices > higher wages > higher prices. It seems to me that we are very near the point where that is going to happen again. The governor of the bank of England has to be a figure with gravitas, commanding respect etc. Not someone promoted on the Peter principle to his own level of incompetence. I have not really followed Bailey's actions as governor but he was a disaster in his previous roles and could not inspire anyone with confidence. Obviously Covid has been a once in a hundred years event but to me he has not shown that he is focussed on also preserving the value of our currency.

I have started reducing my cash holdings significantly and have increased some equity holdings a couple of weeks ago. I don't think GBP is a good place to hold your wealth over the next few years! The 1970 pound has lost about 97% of its purchasing power (yes it now costs a pound to buy what 3p would buy then), so Weimar here we come (or already are!).



Yes, and I never tire of describing my first office job out of skool back in about 1972, which was to recalculate and re-issue the company price list every Monday morning, i.e. issue price rises weekly, rather than yearly as has been the norm for companies in recent decades.

I too have just started to unload my cash-in-hand into something more likely to hold its value. May I enquire which equities you selected please? Just sector(s) would be great if you'd rather not name individual shares, thanks!

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Re: RPI to 6% !

#466888

Postby scrumpyjack » December 17th, 2021, 6:52 pm

Sure. I added to my holdings of Caledonia Inv Trust, Rio and BHP. All up about 8% since increasing my holdings. I know one shouldn't think about that after only a couple of weeks, but still. Caledonia is a long term steady performer on a very high discount due to the family discount, whilst BHP and Rio both miners with fairly low cost of production and I felt they had fallen far too much recently.

These are not recommendations to anyone else. We all have to make our own decisions and take the blame for them ourselves! Still I reckon they are a lot better than our rapidly depreciating currency.

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Re: RPI to 6% !

#466907

Postby MDW1954 » December 17th, 2021, 8:06 pm

dealtn wrote:That's why I (and economists generally) prefer CPI (or other) measures to the blunt RPI.


You have previously (I think) cited your involvement in an official committee of some sorts designed to look at all this. What was less clear was if this had actually resulted in anything? Not being critical; just curious. You may have said, I just can't remember.

Again, not being picky, but I'd like to know why you think that economists generally prefer CPI? I'm not disagreeing (far from it, as it's very rational), but I'm no longer plugged into practicising economists enough to know this. Sadly, those economists that I might ask are starting to fall off the perch...

MDW1954

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Re: RPI to 6% !

#466916

Postby Alaric » December 17th, 2021, 8:27 pm

dealtn wrote:Why anyone would want to do that would be beyond me.


If you wanted to demand, or needed to demand more money to maintain a standard of living, doesn't that point to RPI?

On portfolio management everyone uses the FTSE 100 and similar capitalisation weighted indexes with the geometric based FTSE 30 index ahaving been abandoned .

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Re: RPI to 6% !

#466917

Postby dealtn » December 17th, 2021, 8:39 pm

MDW1954 wrote:
dealtn wrote:That's why I (and economists generally) prefer CPI (or other) measures to the blunt RPI.


You have previously (I think) cited your involvement in an official committee of some sorts designed to look at all this. What was less clear was if this had actually resulted in anything? Not being critical; just curious. You may have said, I just can't remember.

Again, not being picky, but I'd like to know why you think that economists generally prefer CPI? I'm not disagreeing (far from it, as it's very rational), but I'm no longer plugged into practicising economists enough to know this. Sadly, those economists that I might ask are starting to fall off the perch...

MDW1954


I have an economics degree, but was never employed as an economist.

The latter part of my career in the City was spent in the inflation markets. I was invited (along with many others) to participate in consultations surrounding inflation measurement, and more practically on how a switch from RPI to other measures would affect the markets and products, and concerns such as pension schemes. (In effect how contracts written that referred to "inflation" or "RPI" would be affected, and whether that would be consistent, or not).

Unsurpisingly there were many winners and losers, some of whose voices were louder, or more effective than others. The number of such consultations therefore, not unsurpisingly, wasn't one! The process of moving away from RPI has proved to be a long and unfinished one.

Here is an easily readable summary of why RPI is considered not fit for purpose.

https://www.ons.gov.uk/economy/inflatio ... 2018-03-08

In summary, Formula Effect (how it's calculated), lack of housing component, weightings and classifications (and how many in the population are ignored).

RPI has stopped being the official measure for a long time. It would be very controversial if it was got rid of, and the implications affect people and institutions differently.

In practice a large number of contracts have been affected, and a number of court cases remain outstanding I believe, such as pension funds being taken to court to determine fairness. In a very general sense contracts that reference "inflation" have had their base calculation switched from RPI to CPI (or similar), whilst those referencing RPI have remained unchanged. In a similar sense Government Bonds, and many benefits (and things such as rail fare rises), have continued as before.


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