Is recession looming?

[Walkeia]

Yes, but the way I read Walkeia's post, he/she seems to be suggesting that poverty caused by the imminent recession will bear down on inflation just as much, if not more, than increased interest rates.

Hi Nimord,

Apologies if I wasn't clear - in my original post I was highlighting that even if a recession in the economy is imminent, markets tend to be ahead of the real world and forward looking. Therefore I was comparing the moves we have had year to date in the S&P with an average of the recessions since World War II - on those metrics we have about two thirds of a recession priced into stock markets hence I continue to buy into equity market weakness.

I wasn't trying to make the above point re: negative wealth effect feeding into lower inflation other than in specific response to Tara's predictions of ~50% decline in the FTSE and a massive drop in UK house prices both of which I think would be incredibly extreme.

[vand]

The MPC are hoping that inflation will be self limiting hence their restraint however retail data isn't supportive of this stance. Let's hope this isn't 1974 all over again. In real terms inflation is worse. Interest rates were much higher then.

Interest rates should never have been this low. In the past, with similar rates of inflation, we would have seen Base Rate at a level not far off the rate of inflation. Rises always were at least +0.5%, while reductions were always -0.25%. At times of crisis a larger increase might be appropriate, like +1%. The MPC has forgotten what inflation looked like. They have the means of control in their hands. They need to use it.

Banks (and the Gilt market) used to pay interest rates which reflected inflation. 15.5% was available back in the 1970s and 80s. I bought T93 13.75% for my mother-in-law in 1975, and T98 15.5% in 1986. Where are comparable gilts now?

TJH

In addition, they should have begun to tighten as the economy began to improve so that the rate cycle was counter-cyclical to the economic cycle. This is how orthordox Keynsian doctrine is supposed to operate. Instead they waited for confirmation that we have dangerously high inflation before deciding to tackle it.

Now, I think there would have been some element of higher inflation regardless of what happened due to how world events have played out, but if they had done a good job and prudently managed things I think we would be in a situation today where most of the necessary tightening was already done and we weren't so far behind the curve. Instead, it looks like they're going have to tighten farther and faster just as the economy goes into a slump, and this will contribute to a worse recession that otherwise.

One other point for debate is if an recession will be deflationary, as it has been in the past. I just don't think we can take that for granted this time. There are many examples of recessions being inflationary events because output falls faster than demand. After all, demand for basic food, energy and shelter is pretty fixed, and those are the drivers of inflation today. For example, truckers are struggling with fuel prices right now... if they decide they can't operate because fuel prices are too high.. they can't deliver as many groceries to the supermarket, hence its a supply shock that drives inflation even higher...

[AWOL]

In addition, they should have begun to tighten as the economy began to improve so that the rate cycle was counter-cyclical to the economic cycle. This is how orthordox Keynsian doctrine is supposed to operate. Instead they waited for confirmation that we have dangerously high inflation before deciding to tackle it.

Now, I think there would have been some element of higher inflation regardless of what happened due to how world events have played out, but if they had done a good job and prudently managed things I think we would be in a situation today where most of the necessary tightening was already done and we weren't so far behind the curve. Instead, it looks like they're going have to tighten farther and faster just as the economy goes into a slump, and this will contribute to a worse recession that otherwise.

One other point for debate is if an recession will be deflationary, as it has been in the past. I just don't think we can take that for granted this time. There are many examples of recessions being inflationary events because output falls faster than demand. After all, demand for basic food, energy and shelter is pretty fixed, and those are the drivers of inflation today. For example, truckers are struggling with fuel prices right now... if they decide they can't operate because fuel prices are too high.. they can't deliver as many groceries to the supermarket, hence its a supply shock that drives inflation even higher...

In the UK we seam to have the least economically literate politicians on both sides of the house that I can remember. I keep hearing the same answers to the economic situation:

1. Cut Fuel Duty/VAT
2. Windfall tax for British oil and gas companies (see what that does for the ROCE on business cases for improved efficiency, greener technology, securing future supply)
3. Cut central bank rates as higher rates hurt the poor
4. "fight inflation with inflation".

I am not sure what the last one means other than the fact that inflation can self regulate but at the risk of a wage rise spiral.

I really don't think the stimulus ideas of putting more money in people's pockets will work at this time but I accept that it's better than increasing taxation which will slow the economy. I'd be interested what some of you more economically literate guys think would be the appropriate response.

[Tara]

In addition, they should have begun to tighten as the economy began to improve so that the rate cycle was counter-cyclical to the economic cycle. This is how orthordox Keynsian doctrine is supposed to operate. Instead they waited for confirmation that we have dangerously high inflation before deciding to tackle it.

Now, I think there would have been some element of higher inflation regardless of what happened due to how world events have played out, but if they had done a good job and prudently managed things I think we would be in a situation today where most of the necessary tightening was already done and we weren't so far behind the curve. Instead, it looks like they're going have to tighten farther and faster just as the economy goes into a slump, and this will contribute to a worse recession that otherwise.

One other point for debate is if an recession will be deflationary, as it has been in the past. I just don't think we can take that for granted this time. There are many examples of recessions being inflationary events because output falls faster than demand. After all, demand for basic food, energy and shelter is pretty fixed, and those are the drivers of inflation today. For example, truckers are struggling with fuel prices right now... if they decide they can't operate because fuel prices are too high.. they can't deliver as many groceries to the supermarket, hence its a supply shock that drives inflation even higher...

In the UK we seam to have the least economically literate politicians on both sides of the house that I can remember. I keep hearing the same answers to the economic situation:

1. Cut Fuel Duty/VAT
2. Windfall tax for British oil and gas companies (see what that does for the ROCE on business cases for improved efficiency, greener technology, securing future supply)
3. Cut central bank rates as higher rates hurt the poor
4. "fight inflation with inflation".

I am not sure what the last one means other than the fact that inflation can self regulate but at the risk of a wage rise spiral.

I really don't think the stimulus ideas of putting more money in people's pockets will work at this time but I accept that it's better than increasing taxation which will slow the economy. I'd be interested what some of you more economically literate guys think would be the appropriate response.

The appropriate response is of course for the BoE to set interest rates at an appropriate level to counter inflation of over 10%. The BoE is already well behind the inflation curve and a feeble rise from 1% to 1.25% is certainly too little and too late.

If the BoE had any real intention of dealing with this inflation problem then they would already have had interest rates at 5% or higher.

The problem is that the BoE are clearly unwilling to properly fight this inflation with much higher interest rates. The BoE seems far more concerned with appeasing politicians who are desperate that the UK electorate do not have to watch their UK house prices collapse too much before the next election.

[Dod101]

The appropriate response is of course for the BoE to set interest rates at an appropriate level to counter inflation of over 10%. The BoE is already well behind the inflation curve and a feeble rise from 1% to 1.25% is certainly too little and too late.

If the BoE had any real intention of dealing with this inflation problem then they would already have had interest rates at 5% or higher.

The problem is that the BoE are clearly unwilling to properly fight this inflation with much higher interest rates. The BoE seems far more concerned with appeasing politicians who are desperate that the UK electorate do not have to watch their UK house prices collapse too much before the next election.

If it was as simple and obvious as you imply I think something would have been done along these lines, some time ago. Interest rate rises probably ought to happen faster than they are but what do you think the consequences would be? It would increase the cost of living even further for the many who are net borrowers, and not just the cost of mortgages ( which are historically very cheap) Would it help inflation? Would that help reduce the cost of fuel oil and electricity? Of course not, at least not to any extent, and yet the huge increase in the price of these are surely the main cause of inflation not the classic too much money chasing too few goods. It might at the margin help the exchange rate where the pound is quite weak against the dollar and that ought marginally help with the price of oil. I see it as a very fine line to be drawn and nothing like as clear cut as you seem to be suggesting.

Dod

[Nimrod103]

The appropriate response is of course for the BoE to set interest rates at an appropriate level to counter inflation of over 10%. The BoE is already well behind the inflation curve and a feeble rise from 1% to 1.25% is certainly too little and too late.

If the BoE had any real intention of dealing with this inflation problem then they would already have had interest rates at 5% or higher.

The problem is that the BoE are clearly unwilling to properly fight this inflation with much higher interest rates. The BoE seems far more concerned with appeasing politicians who are desperate that the UK electorate do not have to watch their UK house prices collapse too much before the next election.

If it was as simple and obvious as you imply I think something would have been done along these lines, some time ago. Interest rate rises probably ought to happen faster than they are but what do you think the consequences would be? It would increase the cost of living even further for the many who are net borrowers, and not just the cost of mortgages ( which are historically very cheap) Would it help inflation? Would that help reduce the cost of fuel oil and electricity? Of course not, at least not to any extent, and yet the huge increase in the price of these are surely the main cause of inflation not the classic too much money chasing too few goods. It might at the margin help the exchange rate where the pound is quite weak against the dollar and that ought marginally help with the price of oil. I see it as a very fine line to be drawn and nothing like as clear cut as you seem to be suggesting.

Dod

I think you are falling into the trap of assuming present inflation is imported, and therefore nothing can be done about it.
Yet inflation was already rising rapidly before the Ukraine war broke out.

The price of housing has gone stratospheric. My son’s house has gone from £207,000 to £451,000 in 10 years. But he now finds he is being significantly outbid on houses the next size up, and in the latest outbidding the winner is a first time buyer, believe it or not. Money is far too cheap, and the MPC has been criminally incompetent. Housing isn’t even included in the CPI and the MPC remit.

[Dod101]

The appropriate response is of course for the BoE to set interest rates at an appropriate level to counter inflation of over 10%. The BoE is already well behind the inflation curve and a feeble rise from 1% to 1.25% is certainly too little and too late.

If the BoE had any real intention of dealing with this inflation problem then they would already have had interest rates at 5% or higher.

The problem is that the BoE are clearly unwilling to properly fight this inflation with much higher interest rates. The BoE seems far more concerned with appeasing politicians who are desperate that the UK electorate do not have to watch their UK house prices collapse too much before the next election.

If it was as simple and obvious as you imply I think something would have been done along these lines, some time ago. Interest rate rises probably ought to happen faster than they are but what do you think the consequences would be? It would increase the cost of living even further for the many who are net borrowers, and not just the cost of mortgages ( which are historically very cheap) Would it help inflation? Would that help reduce the cost of fuel oil and electricity? Of course not, at least not to any extent, and yet the huge increase in the price of these are surely the main cause of inflation not the classic too much money chasing too few goods. It might at the margin help the exchange rate where the pound is quite weak against the dollar and that ought marginally help with the price of oil. I see it as a very fine line to be drawn and nothing like as clear cut as you seem to be suggesting.

Dod

I think you are falling into the trap of assuming present inflation is imported, and therefore nothing can be done about it.
Yet inflation was already rising rapidly before the Ukraine war broke out.

The price of housing has gone stratospheric. My son’s house has gone from £207,000 to £451,000 in 10 years. But he now finds he is being significantly outbid on houses the next size up, and in the latest outbidding the winner is a first time buyer, believe it or not. Money is far too cheap, and the MPC has been criminally incompetent. Housing isn’t even included in the CPI and the MPC remit.

If it is a trap then I am guilty but most of the inflation is I think imported. Clearly housing is ridiculously priced, quite probably as a result of the very cheap money caused by years of QE and low interest rates. These factors should probably have been dealt with earlier of course but given the pressure on the cost of living now, caused mainly by the price of energy, this may well not be the best time to be tackling that. There I think lies the dilemma.Tackling inflation now by raising interest rates is like dealing with yesterday’s problem today.

Dod

[tjh290633]

Tackling inflation now by raising interest rates is like dealing with yesterday’s problem today.

Dod

Surely it is yesterday's problem that has to be sorted out today. Interest rates should never have fallen below the 2.5% level. The low rates allowed the Government to borrow vast amounts at very low rates, but now the market is pushing those rates up and the Bank is not doing it's job

TJH

[GoSeigen]

Tackling inflation now by raising interest rates is like dealing with yesterday’s problem today.

Dod

Surely it is yesterday's problem that has to be sorted out today. Interest rates should never have fallen below the 2.5% level. The low rates allowed the Government to borrow vast amounts at very low rates, but now the market is pushing those rates up and the Bank is not doing it's job

Which government, Tory or Labour? Because as we are constantly told it is the latter who borrow vast amounts, not the former so there sees to be something wrong somewhere...

What is so special about a level of 2.5%?

What would have happened if real interest rates had been more than 200bp higher than it actually was for thirteen years in the UK while the rest of the world had zero rates?

GS

[Adamski]

Agree with TJH, the BoE is not doing its job.

The inflation target is 2%. They're supposed to set interst rates to keep inflation down at the target level, and not allow it to run away like it has.

We're stuffed now, as going to be painful to get inflation back down.

Got a number of domestic factors as play, Brexit, low productivity (productivity puzzle), Covid recovery, lack of manufacturing.

Not just external factors like Ukraine and energy prices.

So what we could end with is a wage price spiral, interest rates having to be quickly ramped up and a prolonged recession to get inflation down. A bumpy couple of years, straight after 2 years of covid.

What we can hope for is a quick end to the ukraine war which would take pressure off, but looking unlikely at moment as neither wants to lose territory or lose face.

Unfortunately we have Boris-Sunak in charge who are labour lite, and only care about staying in power and borrow endlessly and kick the can down the road.

I feel quite sorry for young uns cause 'The government must do something' is code for more borrowing on top of 2.3 trillion debt which will be like a millstone on future taxpayers.

[ReformedCharacter]

When I was young the question of 'Balance of Payments' always seemed to be a big issue and always in the news but it's not something that I hear much about these days. Is it no longer so important or no longer considered a useful metric? Just curious to know why it isn't mentioned so much these days.

RC

[pje16]

I know what you mean it was often mentioned
I wonder if is because it has been negative for the past 20 years or so
2010 and 2011 look like blips
https://obr.uk/forecasts-in-depth/the-e ... t-balance/

[vand]

Wages are just the price of labour. Milton Friedman largely concluded that higher wages are not a huge contributing factor to inflation, they merely reflected the inflation of everyday goods and services that has already happened. Given how every other factors of production becomes more expensive during an inflationary period, it should be no surprise that labour does the same.

It's absurd to suggest that workers should not try to push for higher wages. In a world where the money supply regularly grows in high single digits each year, workers have ever right to be trying to negotiate a share of those extra currency units.

[dealtn]

The BoE seems far more concerned with appeasing politicians who are desperate that the UK electorate do not have to watch their UK house prices collapse too much before the next election.

On what evidence do you base your claim an independent central bank, and an MPC committee containing independent members, is more concerned with appeasing politicians than following its remit?

[dealtn]

Housing isn’t even included in the CPI and the MPC remit.

I've not been convinced by arguments why the CPI hasn't been amended to CPIH as the relevant index.

[Dod101]

Agree with TJH, the BoE is not doing its job.

The inflation target is 2%. They're supposed to set interst rates to keep inflation down at the target level, and not allow it to run away like it has.

We're stuffed now, as going to be painful to get inflation back down.

Got a number of domestic factors as play, Brexit, low productivity (productivity puzzle), Covid recovery, lack of manufacturing.

Not just external factors like Ukraine and energy prices.

So what we could end with is a wage price spiral, interest rates having to be quickly ramped up and a prolonged recession to get inflation down. A bumpy couple of years, straight after 2 years of covid.

What we can hope for is a quick end to the ukraine war which would take pressure off, but looking unlikely at moment as neither wants to lose territory or lose face.

Unfortunately we have Boris-Sunak in charge who are labour lite, and only care about staying in power and borrow endlessly and kick the can down the road.

I feel quite sorry for young uns cause 'The government must do something' is code for more borrowing on top of 2.3 trillion debt which will be like a millstone on future taxpayers.

I broadly agree with you there, although I think Sunak is an innocent abroad and mostly a straightforward guy. Boris is not.

Dod

[Nimrod103]

Wages are just the price of labour. Milton Friedman largely concluded that higher wages are not a huge contributing factor to inflation, they merely reflected the inflation of everyday goods and services that has already happened. Given how every other factors of production becomes more expensive during an inflationary period, it should be no surprise that labour does the same.

It's absurd to suggest that workers should not try to push for higher wages. In a world where the money supply regularly grows in high single digits each year, workers have ever right to be trying to negotiate a share of those extra currency units.

But the cost of so many 'everyday' goods is beyond Govt and BoE control because they are imported. The only way of getting inflation from that source down is by raising the exchange rate (by increasing interest rates), and perhaps by reducing domestic demand (by increasing interest rates). But the cost of domestic labour is more easily restrained than on those imported things, by clamping down on high wage claims.

Normally just raising interest rates would pressure private employers to clamp down on high wage claims. But with nationalized industries like railways which are completely shielded from market forces, Government has a particularly difficult challenge in facing down powerful unions.

[Adamski]

..with nationalized industries like railways which are completely shielded from market forces, Government has a particularly difficult challenge in facing down powerful unions.

Yes looks like a number of public sector bodies are following suit so could get a wage price spiral. This is problem of letting the inflation cat out of the bag. Its difficult to put back in without drastic measures, which will only do reluctantly after everything else has failed.

[Tara]

The BoE seems far more concerned with appeasing politicians who are desperate that the UK electorate do not have to watch their UK house prices collapse too much before the next election.

On what evidence do you base your claim an independent central bank, and an MPC committee containing independent members, is more concerned with appeasing politicians than following its remit?

We can only go on the evidence of their actions, or in this case their lack of action.

With inflation at over 10%, and interest rates recently raised from only 1% to 1.25%, does the BoE really look as though it is 100% determined to fight this inflation? It certainly does not look like it.

[NotSure]

On what evidence do you base your claim an independent central bank, and an MPC committee containing independent members, is more concerned with appeasing politicians than following its remit?

He who pays the piper usually gets to choose the tune?

The Monetary Policy Committee (MPC) is made up of nine members – the Governor, the three Deputy Governors for Monetary Policy, Financial Stability and Markets and Banking, our Chief Economist and four external members appointed directly by the Chancellor.

External members are appointed to make sure that the MPC benefits from thinking and expertise from outside of the Bank of England. A representative from HM Treasury also sits with the MPC at its meetings. The Treasury representative can discuss policy issues, but is not allowed to vote. They are there to make sure that the MPC is fully briefed on fiscal policy developments and other aspects of the Government's economic policies, and that the Chancellor is kept fully informed about monetary policy.

Each member of the MPC has expertise in the field of economics and monetary policy. Members do not represent individual groups or areas – they are independent.

MPC members serve fixed terms, after which they may be either replaced or reappointed.

https://www.bankofengland.co.uk/about/people/monetary-policy-committee