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Is recession looming?

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gryffron
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Re: Is recession looming?

#508558

Postby gryffron » June 20th, 2022, 11:31 pm

dealtn wrote:
Nimrod103 wrote: 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.

Positive feedback. Leads to wild fluctuations and instability.

Inflation and/or housing costs rise.
To counter this you increase interest rates.
This directly results in housing costs and inflation increasing further
Repeat…

It makes perfect sense to me to ignore housing costs when setting housing costs. So I think the MPC using CPI makes perfect sense. What makes less sense is everyone else using it. Why, for example, would wage settlements want to ignore housing costs?

Gryff

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Re: Is recession looming?

#508571

Postby Nimrod103 » June 21st, 2022, 6:51 am

gryffron wrote:
dealtn wrote:
Nimrod103 wrote: 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.

Positive feedback. Leads to wild fluctuations and instability.

Inflation and/or housing costs rise.
To counter this you increase interest rates.
This directly results in housing costs and inflation increasing further
Repeat…

It makes perfect sense to me to ignore housing costs when setting housing costs. So I think the MPC using CPI makes perfect sense. What makes less sense is everyone else using it. Why, for example, would wage settlements want to ignore housing costs?

Gryff


Surely, by housing costs, one means the cost of a house. Not the cost of borrowing the money to pay for a house already bought.
The cost of a house should be inversely related to mortgage rates.

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Re: Is recession looming?

#508575

Postby gryffron » June 21st, 2022, 7:16 am

Nimrod103 wrote:Surely, by housing costs, one means the cost of a house. Not the cost of borrowing the money to pay for a house already bought.
The cost of a house should be inversely related to mortgage rates.

In the very long term, yes.
But in the short term, the cost of servicing the debt goes up for all those who have already bought.

Gryff

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Re: Is recession looming?

#508576

Postby dealtn » June 21st, 2022, 7:18 am

Tara wrote:
dealtn wrote:
Tara wrote: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.


Which is different to your original claim. Where is the evidence the members are more concerned with appeasing politicians?

I've met a number of them (past and present). I can't think of one that wouldn't challenge an allegation on their independent (of politicians) way of thinking.

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Re: Is recession looming?

#508577

Postby Nimrod103 » June 21st, 2022, 7:25 am

gryffron wrote:
Nimrod103 wrote:Surely, by housing costs, one means the cost of a house. Not the cost of borrowing the money to pay for a house already bought.
The cost of a house should be inversely related to mortgage rates.

In the very long term, yes.
But in the short term, the cost of servicing the debt goes up for all those who have already bought.

Gryff


What I meant was that the cost of servicing the debt should be excluded from the inflation figure, but the original cost of the house should be included.

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Re: Is recession looming?

#508578

Postby dealtn » June 21st, 2022, 7:25 am

Nimrod103 wrote:
Surely, by housing costs, one means the cost of a house. Not the cost of borrowing the money to pay for a house already bought.
The cost of a house should be inversely related to mortgage rates.


No. Housing costs with respect to price inflation aren't about the cost to buy a house. (Just as the cost to buy shares or other investments wouldn't be in a price inflation model). If you wanted, though, you could have an asset price inflation metric, and target that should you choose. Few are proposing such.

The housing component in CPIH, and in similar indices across other economies, is the imputed rental cost of housing. So compares how rents have moved, and what those who own (or part own) their house would pay in rent (to themselves). Rental yields are correlated to house prices, and mortgage rates, but are do not have a direct relationship such that mortgage rate up means rent up. The cost of borrowing rises, and mortgages typically cost more, but with prices going up demand for products reduce also. Housing supply (existing and new) are also affected by interest rate rises, and will affect the rental and buyer markets differently too.

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Re: Is recession looming?

#508579

Postby Nimrod103 » June 21st, 2022, 7:30 am

dealtn wrote:
Tara wrote:
dealtn wrote:
Tara wrote: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.


Which is different to your original claim. Where is the evidence the members are more concerned with appeasing politicians?

I've met a number of them (past and present). I can't think of one that wouldn't challenge an allegation on their independent (of politicians) way of thinking.


But there must be some explanation for why external members of the MPC are almost always more hawkish on rates than internal members. It is not coincidence.

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Re: Is recession looming?

#508580

Postby dealtn » June 21st, 2022, 7:36 am

Nimrod103 wrote:
What I meant was that the cost of servicing the debt should be excluded from the inflation figure, but the original cost of the house should be included.


Then you would have a severely distorted, and under reporting of inflation, as in rising markets the original cost of a house would be below market rates (as would rents, imputed or otherwise). How would that inaccuracy help in policy targeting?

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Re: Is recession looming?

#508581

Postby dealtn » June 21st, 2022, 7:40 am

Nimrod103 wrote:
dealtn wrote:
Tara wrote:
dealtn wrote:
Tara wrote: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.


Which is different to your original claim. Where is the evidence the members are more concerned with appeasing politicians?

I've met a number of them (past and present). I can't think of one that wouldn't challenge an allegation on their independent (of politicians) way of thinking.


But there must be some explanation for why external members of the MPC are almost always more hawkish on rates than internal members. It is not coincidence.


I'm not sure that's true. I would say external members are more likely than internal BoE appointees, to argue for a change - in both directions. Institutionally bank appointed members are perhaps more conservative and desiring of the status quo (or more probably "wait and see"). Also they more likely suffer from unconscious "group think". During the deflationary past decade and a bit, resulting in extraordinary monetary policy, it was often the independents pressing more aggressively in the dovish direction.

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Re: Is recession looming?

#508584

Postby scotview » June 21st, 2022, 8:13 am

dealtn wrote:
I'm not sure that's true. I would say external members are more likely than internal BoE appointees, to argue for a change - in both directions.


What I cannot understand is why these highly educated economists don't all arrive at exactly the same decision on what the best interest rate is to achieve the BoE's objective.

If bridges, ships and planes were designed along the lines of economic theory no body would travel on them.

Seems to me economics is either a lot of mumbo jumbo or it is pure politic.

Artificial intelligence anyone ?

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Re: Is recession looming?

#508586

Postby Nimrod103 » June 21st, 2022, 8:22 am

dealtn wrote:
Nimrod103 wrote:
What I meant was that the cost of servicing the debt should be excluded from the inflation figure, but the original cost of the house should be included.


Then you would have a severely distorted, and under reporting of inflation, as in rising markets the original cost of a house would be below market rates (as would rents, imputed or otherwise). How would that inaccuracy help in policy targeting?


I'm not sure I follow why inflation would be under-reported.
The average (real) cost of a house in 1996 was £110,000. By 2005 it was £270,000. In money of the day terms, that rise would have been much bigger. Yet, that rise was inflationary, yet was completely ignored in CPI/RPI because it was outside the BoE remit.

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Re: Is recession looming?

#508588

Postby Nimrod103 » June 21st, 2022, 8:29 am

dealtn wrote:
Nimrod103 wrote:
dealtn wrote:
Tara wrote:
dealtn wrote:
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.


Which is different to your original claim. Where is the evidence the members are more concerned with appeasing politicians?

I've met a number of them (past and present). I can't think of one that wouldn't challenge an allegation on their independent (of politicians) way of thinking.


But there must be some explanation for why external members of the MPC are almost always more hawkish on rates than internal members. It is not coincidence.


I'm not sure that's true. I would say external members are more likely than internal BoE appointees, to argue for a change - in both directions. Institutionally bank appointed members are perhaps more conservative and desiring of the status quo (or more probably "wait and see"). Also they more likely suffer from unconscious "group think". During the deflationary past decade and a bit, resulting in extraordinary monetary policy, it was often the independents pressing more aggressively in the dovish direction.


I'm sure I read it yesterday, though I cannot find the exact source. Liam Halligan in the Telegraph of 18th June was writing about the external andinternal members voting as blocks.

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Re: Is recession looming?

#508589

Postby dealtn » June 21st, 2022, 8:37 am

Nimrod103 wrote:
dealtn wrote:
Nimrod103 wrote:
What I meant was that the cost of servicing the debt should be excluded from the inflation figure, but the original cost of the house should be included.


Then you would have a severely distorted, and under reporting of inflation, as in rising markets the original cost of a house would be below market rates (as would rents, imputed or otherwise). How would that inaccuracy help in policy targeting?


I'm not sure I follow why inflation would be under-reported.
The average (real) cost of a house in 1996 was £110,000. By 2005 it was £270,000. In money of the day terms, that rise would have been much bigger. Yet, that rise was inflationary, yet was completely ignored in CPI/RPI because it was outside the BoE remit.


I am arguing that if you wanted an inflation measure that included "the original cost of a house", and by definition that doesn't rise, yet other prices are rising, then by definition that price index would lag the one that included all things that were rising. I can't see the merit in such an index.

Now RPI (and CPI that ignores housing) also has this issue, although they are price inflation indices, not asset inflation indices. A better (price) inflation index, and one that includes the price of housing provision (and not purchase) would look similar to CPIH - and would also reflect substitution effects that recognises as some prices rise, and take up a disproportionate amount of the "basket", which many claim housing does, the macroeconomic effect of this on the reducing available spend on other constituents in the basket is captured.

The BoE remit is incidental to the accuracy of the macreconomic measurement of inflation, which is what my responses have focussed on.

Now if that inaccuracy of alignment between the measurement, and the remit attached to this inaccurate index also leads to secondary effects (or feedback) where policy response is sub-optimal that too can be a criticism (and one I am not averse to making). The 2 most prominent being, firstly, CPI (and RPI before) don't include housing, which is a core element of spend in society, and secondly, asset price inflation (including but not limited to housing) also have macroeconomic consequneces, and should be subject to a remit, and policy response too. For many the wealth effect of asset price changes are a key component of changes in demand (and supply) in the underlying economy, and thus should be taken into account in monetary (and possibly fiscal) economic policy.

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Re: Is recession looming?

#508596

Postby Nimrod103 » June 21st, 2022, 8:51 am

dealtn wrote:
Nimrod103 wrote:
dealtn wrote:
Nimrod103 wrote:
What I meant was that the cost of servicing the debt should be excluded from the inflation figure, but the original cost of the house should be included.


Then you would have a severely distorted, and under reporting of inflation, as in rising markets the original cost of a house would be below market rates (as would rents, imputed or otherwise). How would that inaccuracy help in policy targeting?


I'm not sure I follow why inflation would be under-reported.
The average (real) cost of a house in 1996 was £110,000. By 2005 it was £270,000. In money of the day terms, that rise would have been much bigger. Yet, that rise was inflationary, yet was completely ignored in CPI/RPI because it was outside the BoE remit.


I am arguing that if you wanted an inflation measure that included "the original cost of a house", and by definition that doesn't rise, yet other prices are rising, then by definition that price index would lag the one that included all things that were rising. I can't see the merit in such an index.

Now RPI (and CPI that ignores housing) also has this issue, although they are price inflation indices, not asset inflation indices. A better (price) inflation index, and one that includes the price of housing provision (and not purchase) would look similar to CPIH - and would also reflect substitution effects that recognises as some prices rise, and take up a disproportionate amount of the "basket", which many claim housing does, the macroeconomic effect of this on the reducing available spend on other constituents in the basket is captured.

The BoE remit is incidental to the accuracy of the macreconomic measurement of inflation, which is what my responses have focussed on.

Now if that inaccuracy of alignment between the measurement, and the remit attached to this inaccurate index also leads to secondary effects (or feedback) where policy response is sub-optimal that too can be a criticism (and one I am not averse to making). The 2 most prominent being, firstly, CPI (and RPI before) don't include housing, which is a core element of spend in society, and secondly, asset price inflation (including but not limited to housing) also have macroeconomic consequneces, and should be subject to a remit, and policy response too. For many the wealth effect of asset price changes are a key component of changes in demand (and supply) in the underlying economy, and thus should be taken into account in monetary (and possibly fiscal) economic policy.


I did not mean the original cost, as in first sale, cost. I meant the actual cost of buying the house when it changed hands. Several organizations generate an average figure. I rely on the one on the title page of Housepricecrash, which comes from Nationwide.

The financing of that purchase through a mortgage is entirely different, as the borrowing cost will fluctuate with interest rates. I would not expect to see financing costs in an inflation measure.

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Re: Is recession looming?

#508609

Postby vand » June 21st, 2022, 9:19 am

While I don't personally place much weight in what the new Oracle of Wall Street says, the fact that a huge number of people now do makes a recession a self-fulfilling prophecy when he says that there's is more "likely than not" to be one in the near term:

https://www.youtube.com/watch?v=gk-e6ybJ76I

ursaminortaur
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Re: Is recession looming?

#508646

Postby ursaminortaur » June 21st, 2022, 12:26 pm

dealtn wrote:
Nimrod103 wrote:
dealtn wrote:
Nimrod103 wrote:
What I meant was that the cost of servicing the debt should be excluded from the inflation figure, but the original cost of the house should be included.


Then you would have a severely distorted, and under reporting of inflation, as in rising markets the original cost of a house would be below market rates (as would rents, imputed or otherwise). How would that inaccuracy help in policy targeting?


I'm not sure I follow why inflation would be under-reported.
The average (real) cost of a house in 1996 was £110,000. By 2005 it was £270,000. In money of the day terms, that rise would have been much bigger. Yet, that rise was inflationary, yet was completely ignored in CPI/RPI because it was outside the BoE remit.


I am arguing that if you wanted an inflation measure that included "the original cost of a house", and by definition that doesn't rise, yet other prices are rising, then by definition that price index would lag the one that included all things that were rising. I can't see the merit in such an index.

Now RPI (and CPI that ignores housing) also has this issue, although they are price inflation indices, not asset inflation indices. A better (price) inflation index, and one that includes the price of housing provision (and not purchase) would look similar to CPIH - and would also reflect substitution effects that recognises as some prices rise, and take up a disproportionate amount of the "basket", which many claim housing does, the macroeconomic effect of this on the reducing available spend on other constituents in the basket is captured.

The BoE remit is incidental to the accuracy of the macreconomic measurement of inflation, which is what my responses have focussed on.

Now if that inaccuracy of alignment between the measurement, and the remit attached to this inaccurate index also leads to secondary effects (or feedback) where policy response is sub-optimal that too can be a criticism (and one I am not averse to making). The 2 most prominent being, firstly, CPI (and RPI before) don't include housing, which is a core element of spend in society, and secondly, asset price inflation (including but not limited to housing) also have macroeconomic consequneces, and should be subject to a remit, and policy response too. For many the wealth effect of asset price changes are a key component of changes in demand (and supply) in the underlying economy, and thus should be taken into account in monetary (and possibly fiscal) economic policy.


Unlike CPI RPI includes housing costs.

https://www.ons.gov.uk/economy/inflationandpriceindices/articles/understandingthedifferentapproachesofmeasuringowneroccupiershousingcosts/quarter3julytosept2016#spotlight-owner-occupiers-housing-costs-in-the-rpi

Following user requests, this spotlight looks at the measure of owner occupiers’ housing costs (OOH) that is included in the RPI
.
.
.
The RPI is intended to follow an accounting approach to estimating OOH on a user costs basis similar to the rental equivalence approach (that is, it aims to measure the cost of using housing services). In theory, the full user cost model includes mortgage interest paid, opportunity cost of capital used, depreciation, running costs minus the capital gain. In practice, some of these elements are not directly observable and most countries that apply the user cost approach adapt this model in some way. The RPI can be thought of as following a user cost model, with opportunity costs and capital gains excluded. This is approach taken by the RPI Advisory Committee when they reviewed the treatment of housing costs in the RPI in 1994.


Note. From the above article there are a number of different ways to measure owner occupier's housing costs (OOH) and CPIH and RPI don't measure it in exactly the same way.

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Re: Is recession looming?

#508661

Postby Tara » June 21st, 2022, 1:43 pm

dealtn wrote:
Tara wrote:
dealtn wrote:
Tara wrote: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.


Which is different to your original claim. Where is the evidence the members are more concerned with appeasing politicians?

I've met a number of them (past and present). I can't think of one that wouldn't challenge an allegation on their independent (of politicians) way of thinking.


And how would you measure their so called “Independence” anyway? It cannot be measured in any objective way. As I said, we can only go on the evidence of their actions.

And I said that the BoE “seems” far more concerned with appeasing politicians than really fighting inflation that is now over 10%. Anyway, that is certainly the way it appears to me and probably to many other people.

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Re: Is recession looming?

#508687

Postby Charlottesquare » June 21st, 2022, 4:59 pm

Tara wrote:
dealtn wrote:
Tara wrote:
dealtn wrote:
Tara wrote: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.


Which is different to your original claim. Where is the evidence the members are more concerned with appeasing politicians?

I've met a number of them (past and present). I can't think of one that wouldn't challenge an allegation on their independent (of politicians) way of thinking.


And how would you measure their so called “Independence” anyway? It cannot be measured in any objective way. As I said, we can only go on the evidence of their actions.

And I said that the BoE “seems” far more concerned with appeasing politicians than really fighting inflation that is now over 10%. Anyway, that is certainly the way it appears to me and probably to many other people.


How long does each current monthly set of price increases remain within the current inflation measurement? Answer, 12 months, next month we drop June 2021, in August 2022 we drop July 2021 etc.

How long do interest rate increases take to slow the economy? Answer, usually quite a while.

It is all very well saying 11% inflation, must act now, must do large increase in rates, but the economy does not work with instant reaction and unless prices continue rising at their current rate (Are they going to or is energy price/food price shock a one off adjustment?) then bumping interest rates up for inflation that might not be there in 12 months, or certainly not to the same extent, could be a very bad plan.

Remember inflation is a rate of change measure, are prices going to continue to increase at the same rate is the question?

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Re: Is recession looming?

#508689

Postby scrumpyjack » June 21st, 2022, 5:27 pm

Charlottesquare wrote:It is all very well saying 11% inflation, must act now, must do large increase in rates, but the economy does not work with instant reaction and unless prices continue rising at their current rate (Are they going to or is energy price/food price shock a one off adjustment?) then bumping interest rates up for inflation that might not be there in 12 months, or certainly not to the same extent, could be a very bad plan.

Remember inflation is a rate of change measure, are prices going to continue to increase at the same rate is the question?


The danger is, as happened in the seventies, that the longer inflation is allowed to continue the more embedded it becomes in people's expectations and we rapidly get the price increase -> wage increase -> price increase -> wage increase spiral. That is extremely dangerous, more so than having a recession which is anyway a natural part of the economic cycle. I don't think many of those in government managing economic policy experienced what happened in the seventies. I did and, like Germans who lived through the hyper inflation of the Weimar Republic, think it better to come down hard on inflation as early as possible.Kicking the can down the road is not a good plan!

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Re: Is recession looming?

#508694

Postby Nimrod103 » June 21st, 2022, 5:53 pm

Charlottesquare wrote:
Tara wrote:
dealtn wrote:
Tara wrote:
dealtn wrote:
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.


Which is different to your original claim. Where is the evidence the members are more concerned with appeasing politicians?

I've met a number of them (past and present). I can't think of one that wouldn't challenge an allegation on their independent (of politicians) way of thinking.


And how would you measure their so called “Independence” anyway? It cannot be measured in any objective way. As I said, we can only go on the evidence of their actions.

And I said that the BoE “seems” far more concerned with appeasing politicians than really fighting inflation that is now over 10%. Anyway, that is certainly the way it appears to me and probably to many other people.


How long does each current monthly set of price increases remain within the current inflation measurement? Answer, 12 months, next month we drop June 2021, in August 2022 we drop July 2021 etc.

How long do interest rate increases take to slow the economy? Answer, usually quite a while.

It is all very well saying 11% inflation, must act now, must do large increase in rates, but the economy does not work with instant reaction and unless prices continue rising at their current rate (Are they going to or is energy price/food price shock a one off adjustment?) then bumping interest rates up for inflation that might not be there in 12 months, or certainly not to the same extent, could be a very bad plan.

Remember inflation is a rate of change measure, are prices going to continue to increase at the same rate is the question?


Correct, but the inflation % increase, although transient in the figures, continues to be there - unless that is we go into a phase of deflation which removes its effect.
Since we came off the gold standard, deflation now seems impossible to even contemplate, let alone impose.

I fail to see why the UK cannot have a similar inflation rate to that other self contained banking economy, Switzerland, which was 2.9% for the year to May 22. The GBP has lost so much value compared to the Swiss franc since I first was aware of it on my first trip to Switzerland in 1976. The Swiss nation appears to be happy. Why can't we run an economy like theirs?


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