Inflation

[Adamski]

I think the era of ultra low interest rates is likely over. Lasted from 2009 to now. Base rates used to be higher than inflation, sometimes by a wide margin 1980s - 2008. Shopping around you could make money on building society savings vs inflation. Now of course you're losing money in real terms by very wide margin. My guess is once inflation falls back to target, base rates will be brought down, but not to the level they were previously, should be better for savers and worse for borrowers.

[scrumpyjack]

Pretty sure I read somewhere that the hand outs were not going to reduce CPI ((an OBR decision if I recall correctly).

It was all to do with the way they were being treated/accounted for.

But I could be wrong.

Exactly, so when people claim a pay rise for CPI, CPI overstates their inflation because they have had handouts to help pay the increased energy costs.

[1nvest]

I think the era of ultra low interest rates is likely over. Lasted from 2009 to now. Base rates used to be higher than inflation, sometimes by a wide margin 1980s - 2008. Shopping around you could make money on building society savings vs inflation. Now of course you're losing money in real terms by very wide margin. My guess is once inflation falls back to target, base rates will be brought down, but not to the level they were previously, should be better for savers and worse for borrowers.

Kings/State used to need to borrow money, when money was gold/silver, worth its weight. Being finite, inflation broadly averaged 0%, such that interest paid on loans (lending them your silver/gold) to the King/State were a real rate of return. Many preferred to lend for that benefit instead of holding money (silver or gold coins).

That all ended in 1931 when too many were converting Pounds into gold for that to be sustained.

Since then we've had fiat money, backed by nothing other than promises. Where the state prints/spends new money that devalues all other notes in circulation, might be considered a form of micro-taxation, but is more commonly just known as 'inflation'.

The state no longer needs to borrow money, it can simply print/spend. Even banks nowadays can just create money to lend borrowers, they no longer need depositors money. Banks used to store your money securely for you, nowadays a deposit is a transfer of your money to the bank, that is free to pretty much do with what it likes (within regulations). Some banks even play a heads they win, tails the taxpayer bails them out game-play.

Interest paid net of inflation and taxation no longer is the real gain benefit it was of old. The state can direct inflation, interest rates, tax rates .. etc. you're lending to someone where the table is stacked heavily in their favour.

The final decoupling from gold occurred in the late 1960's, when the US made such a break as a means to help pay down the cost of the Vietnam war. Originally the US established common agreement that other countries would use the US dollar instead of gold for international trade, and that the US would peg the dollar to gold. That promise was progressively broken, as occurs with all fiat currencies, coming to a end in the late 1960's/early 1970's. That induced concerns and inflation/interest rates spiked - a lot. Since then we've seen a broad trend of ever decreasing interest rates, down to more recent negative real levels. Your pensions/pension funds have to, by law, "invest" in government bonds (lend to the state), are in effect taxed by the state. Nowadays they're pretty much the only ones who do buy Gilts.

You use currency (Pounds) as a alternative to bartering. But nowadays that's just paper or low cost metal coins (even copper penny coins ceased to be copper in 1991 when copper prices spiked, from 1971 (decimalisation/new coins) to 1990 they were 97% copper, but nowadays are just copper plated steel). But that's not a store of value. For a store of value you want a 'money' that is backed by something tangible, such as stocks and gold and only convert that into currency close to the time you want to exchange for something (goods/products/services) and similarly convert any surplus currency you have into something tangible (stocks/gold) soon after having received such. Typically a brokerage account that is used to store such 'money' has a T+3 day notice period for withdrawals.

Reasonably investors prior to 1932 might have simply lent to the state, perhaps held a 10 year Gilt/Treasury ladder. From 1932 a investor might have opted for 50/50 stock/gold, perhaps opting for US$ and US stocks for the stock holdings assuming they had £ invested in a UK home. Three currencies, just 33% with counter party risk (house and gold in-hand), three assets (land/stocks/commodity (gold)). Diversified. Since 1896 (with just bonds pre 1932, stock/gold 50/50 thereafter) for all 30 year periods that sustained a 4% SWR, in the worst case. More often ended 30 years with residual value remaining, typically at least half the inflation adjusted start date amount, sometimes all of the inflation adjusted start date amount, periodically more.

I wouldn't be surprised if negative real yields were here to stay, long term. Neither the state nor banks need your money, they're more inclined to charge for you to store money with them. High inflation is just the same as high taxation, under fiat both tend to spike at times, typically when policy makers foul up. The exception is the few mutual building societies around, who do match borrowers/lenders - old style. Most of those however have converted over to being 'banks'. You used to be able to uplift values by inflation when calculating capital gains taxation, even that has been removed and now you're taxed on what at least in part is inflation (double taxation). Government demands for spending other peoples money is insatiable. The UK is in a mess for permitting migration floodgates to be opened, whilst under-spending on infrastructure to accommodate the larger population. A risk is that is nearing a critical cliff-edge point and should confidence/acceptance of fiat currency falter/fail you neither want to be holding cash (Pounds) nor having lent to banks/state. In the run up to such however the state will do as much as it can to prevent you avoiding the pain. If/when you are restricted to only taking so much cash out of the country, or holding gold is prohibited, such will be pre-warning indicators of the rapidly approaching fiat cliff-edge, when you will be far better served by holding foreign currencies and/or stocks and/or gold. When in the case for gold you want to be holding physical gold, not paper-gold such as gold ETF's (even ones that claim to be backed by physical gold). There's over one hundred times more paper gold than there is physical gold, so over 99% will be disappointed if they're not holding physical gold.

[Tedx]

According to Bloomberg, traders are now betting on the BOE cutting interest rates.

Did raising interest rates do anything to control the current bout of inflation in the first place? Probably not, but the BOE had to be seen to do something eh?

[servodude]

According to Bloomberg, traders are now betting on the BOE cutting interest rates.

Did raising interest rates do anything to control the current bout of inflation in the first place? Probably not, but the BOE had to be seen to do something eh?

They only have one hammer in the toolbox and they have a lot of pressure on them to use it

[Tedx]

But....but..but....they're independent!

Aye, right.

[CliffEdge]

Inflation is a generational thing, like war.
Until the current children running the world grow up, it's here to stay.

[scotview]

Has the BoE raising interest rates had any effect on the type of inflation we are seeing just now ?

What if they had left interest rates as they were ?

Is inflation not just going to do what is going to do, as a result of big external shocks ?

[Tedx]

Has the BoE raising interest rates had any effect on the type of inflation we are seeing just now ?

What if they had left interest rates as they were ?

That's my point. Raising interest rates didn't create any more gas did it? People moderated their usage becuase of the market price of energy.

All raising interest rates have done is shovel money from those of more moderate means to the banks and well off folk. And probably caused a recession.

[servodude]

Has the BoE raising interest rates had any effect on the type of inflation we are seeing just now ?

What if they had left interest rates as they were ?

That's my point. Raising interest rates didn't create any more gas did it? People moderated their usage becuase of the market price of energy.

All raising interest rates have done is shovel money from those of more moderate means to the banks and well off folk. And probably caused a recession.

True.

But in admitting such we do suggest that the "systems" in place are a bit... "fanciful", would be a nice way to put it.

In the engineering world I find myself most professionally involved such dogmatic imagination tends to go the way of collapsed bridges, crashed planes, exploding cars, misdiagnosed cancer, or recalled CPAP devices.
There's a limit to how much you can ignore pragmatism before it bites

[Nimrod103]

Has the BoE raising interest rates had any effect on the type of inflation we are seeing just now ?

What if they had left interest rates as they were ?

Is inflation not just going to do what is going to do, as a result of big external shocks ?

It always used to be said that interest rate rises took time to have an effect, probably 6 months at least. I am sure that still applies. Rate rises will have little effect on inflation caused by raw material price rises, but they will impact secondary inflation caused by inflationary pay awards, of which there are likely to be many over the coming year, and I suspect the BoE is very alert to problem.

Saying that, AIUI market are already predicting a peak in rates mid year, and a slight decrease towards the end of 2023, caused no doubt by a deepening recession and maybe a collapse in the housing market. But again, saying that, my general view is that rates had to rise, so as to return to "normality", after the appalling policy errors of ZIRP for the last 8 years or so. It was just unfortunate that the BoE, so far behind the curve, decided (probably under pressure from the Fed) to raise rates just as Truss/Kwarteng wanted to borrow a lot more to stimulate the economy. Doubly unfortunate that the BoE had ignored advice over the last two years to raise loans at low rates prevailing, and instead borrowed so much at floating rates. As a result our borrowing costs will make our recession deeper.

[dealtn]

Has the BoE raising interest rates had any effect on the type of inflation we are seeing just now ?

What if they had left interest rates as they were ?

That's my point. Raising interest rates didn't create any more gas did it? People moderated their usage becuase of the market price of energy.

All raising interest rates have done is shovel money from those of more moderate means to the banks and well off folk. And probably caused a recession.

Can you explain your transmission mechanism where the banks are the recipients of this money please?

[vand]

Anecdotally I see fuel and food prices actually coming down now. Fuel has been coming down since last summer, but I am now seeing many food items starting to drop in price, or rather there are many more offers in the stores.

Absent a further commodities spike I think CPI could fall faster than most people think.

[Alaric]

but I am now seeing many food items starting to drop in price, or rather there are many more offers in the stores..

Can you think of a few dropping in price? Milk for example is still 95p for the one pint carton (used to be 50p). Butter minimum price seems to be £ 1.99.
There are still offers, but what used to be 2 for £ 4 is now 2 for £ 4.50 or even £ 5 .

[Tedx]

Has the BoE raising interest rates had any effect on the type of inflation we are seeing just now ?

What if they had left interest rates as they were ?

That's my point. Raising interest rates didn't create any more gas did it? People moderated their usage becuase of the market price of energy.

All raising interest rates have done is shovel money from those of more moderate means to the banks and well off folk. And probably caused a recession.

Can you explain your transmission mechanism where the banks are the recipients of this money please?

https://www.investopedia.com/ask/answer ... sector.asp

[1nvest]

The Bank of England has a new headache – falling inflation
The Telegraph. Szu Ping Chan
Sun, 29 January 2023

https://uk.finance.yahoo.com/news/bank- ... c=fin-srch

[1nvest]

Has the BoE raising interest rates had any effect on the type of inflation we are seeing just now ?

What if they had left interest rates as they were ?

Is inflation not just going to do what is going to do, as a result of big external shocks ?

There's enough disincentive to not invest in the UK already having been instated by Sunak/Hunt (GDP compression). Without UK interest rates being increased to above US rates the outflow could have turned into a torrent. LT/KK were on the right track, just massively poor implementation practice. So instead the complete opposite track was adopted (Sunak has clearly demonstrated his wastefulness of public funds such as furloughing some, not 3 million self employed, losing billions ...etc. and exporting Covid into the most vulnerable (care homes) with low/no financial (or PPE) support).

It's sad when the UK's best hope lays in waiting for a Labour government because the Tories can't be trusted with the economy.

[dealtn]

Has the BoE raising interest rates had any effect on the type of inflation we are seeing just now ?

What if they had left interest rates as they were ?

That's my point. Raising interest rates didn't create any more gas did it? People moderated their usage becuase of the market price of energy.

All raising interest rates have done is shovel money from those of more moderate means to the banks and well off folk. And probably caused a recession.

Can you explain your transmission mechanism where the banks are the recipients of this money please?

https://www.investopedia.com/ask/answer ... sector.asp

Nothing there that demonstrates a flow of cash from those of "more moderate means" to "banks". Bank profitability rises, generally speaking, as interest rates rise. That is due to increased margin capture as fixed costs of provisions such as current accounts shrink. Also it is usual that higher interest rate environments reflect periods of reduced bad debts and provisioning. Neither of which are cash transfers from the lower end of their customer base.

[vand]

but I am now seeing many food items starting to drop in price, or rather there are many more offers in the stores..

Can you think of a few dropping in price? Milk for example is still 95p for the one pint carton (used to be 50p). Butter minimum price seems to be £ 1.99.
There are still offers, but what used to be 2 for £ 4 is now 2 for £ 4.50 or even £ 5 .

Fresh produce seems to be coming down slightly. While yes your pricing examples are true, it's also true that in my recent shop I was able to buy catfood at £3/pack on offer from £5, 2ltr coke bottle at £1.75 instead of £2.75, and plenty of other examples. Deflation happens from peak pricing, disinflation happens from peak rate of change in price.
And unleaded of course down from £1.80+ to £1.50ish.

I call it as as I see it - amongst my peers I was actually the first to point out that prices were beginning to rise from mid 2021 as I saw them, well before they were picked up in the inflation numbers. I am seeing the opposite now - inflation is subsiding everywhere and I think we will see it in the CPI very soon.

[Tedx]

BOE decision day tomorrow.

So how much willl the BOE raise rates by to make more gas?