Does raising base rates really reduce inflation?

[Tedx]

Yes, corrected. They are all tightening. The MPC is the only one doing it via active sales.

[TheMotorcycleBoy]

Well we had some good news yesterday as the most generally recognised inflation indicators fell, and more than several had forecast.

https://www.ons.gov.uk/economy/inflatio ... n/june2023

OOH (owner-occupier housing) costs rose presumably due to rising mortgages rates. I'm curious as to Tara's opinion of that particular figure, as she usually refers the UKs overheated housing market on this thread.

Matt

[ursaminortaur]

Interest rates have been raised again with the tough talk from the MPC suggesting that there is more to come.

https://www.theguardian.com/business/2023/aug/03/more-pain-in-store-tough-talking-bank-raises-uk-interest-rates-and-a-few-eyebrows

Previous rate rises are certainly hurting (as the Bank itself admits), but the feeling in the financial markets is that there will be at least one, and perhaps two, more quarter-point increases before the Bank’s monetary policy committee (MPC) hits the pause button.

Of itself, the August rate decision was mildly doveish. After raising rates by a half point in June, there had been some speculation of a repeat performance this month. In the end, the MPC’s 14th rate increase in a row was limited to a quarter point rise to 5.25%.

What did raise a few eyebrows was the Bank’s language, which has toughened up. The MPC expressed concern about the level of wage increases and said it would “ensure that Bank rate is sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term”.

Financial markets saw that not just as a sign that there may be further increases in interest rates to come, but also that rates will stay high. Anybody thinking about whether to go on to a variable rate mortgage should factor in that there may be no cut in interest rates until well into 2024.

[GoSeigen]

There's room for the US yield curve to rise another 50bp and still be comfortably within trend. 10y bond yields might rise even more given the severe inversion at the moment.

UK likely similar... rates are still accommodative given where inflation is.


GS

[AsleepInYorkshire]

Why is Spain’s inflation so much lower than the UK’s? Because it stood up to business

Spain capped energy prices by more than the UK, lowered the cost of public transport, taxed excess profits and put in place limits on how much landlords can raise rents. While also coming with costs, this kept inflation from spreading more widely and more persistently than elsewhere.

Similar measures would have made a big difference here. One year ago, at the Institute for Public Policy Research, we argued for a similar approach in the UK, of using fiscal policy to reduce prices directly. But the call was only partly heeded, in the form of energy price support measures. While in Spain energy price caps are set to continue into next year, in the UK, the degree of support has already been lowered, covering fewer businesses than previously, and is set to end completely in autumn.

AiY(D)

[vand]

UK likely similar... rates are still accommodative given where inflation is.

Not any more, imo. yes, rates vs last published figures are accommodative, but we know there is a lag between what happens on the coalface of the economy and when it shows up in the figures.

We also know that the rates are a crude tool whose effects take time to feed through. Everything I see right now indicates that the real time rate of price inflation in the economy has slowed sharply.. and this will show in the numbers eventually. My guess is that we have positive real interest rates as of right now.

You may call this seeing what I want to see, but I back myself on this, just as I did in sniffing out the inflation well before it began to show through in the official figures.

[GoSeigen]

UK likely similar... rates are still accommodative given where inflation is.

Taylor rule calls for US rates between 6.1 and 6.4%. Actual rate: 5%.


GS

[vand]

UK likely similar... rates are still accommodative given where inflation is.

Taylor rule calls for US rates between 6.1 and 6.4%. Actual rate: 5%.


GS

and what did this "rule" prescribe during the era of ZIRP?

Frankly I'm pissing myself that anyone lends any weight to this sort of lunacy.

[scotview]

Would repricing energy to actual production cost (cheap renewables and gas) have had more effect on inflation than interest rates ?

[GoSeigen]

Taylor rule calls for US rates between 6.1 and 6.4%. Actual rate: 5%.


GS

and what did this "rule" prescribe during the era of ZIRP?

Frankly I'm pissing myself that anyone lends any weight to this sort of lunacy.

Just a data point. I'm not defending it. There are others. But I'm not promoting them either. You'll have to apply your own judgement.

GS

[vand]

It's not just base rates, of course. New money creation is also fundamental, and the UK money supply by all measures has now been contracting since last summer. This is relatively rare, last observed during the European debt crisis in 2011-12, but arguably happening at a faster rate now that we have recorded before.

https://tradingeconomics.com/united-kin ... -supply-m3

make no mistake - this is not an accomodative policy.



BTW if anyone thinks just because Turkish rates are 15% or whatever they are running tight monetary policy:
https://tradingeconomics.com/turkey/money-supply-m3

[TheMotorcycleBoy]

Why is Spain’s inflation so much lower than the UK’s? Because it stood up to business

Spain capped energy prices by more than the UK, lowered the cost of public transport, taxed excess profits and put in place limits on how much landlords can raise rents. While also coming with costs, this kept inflation from spreading more widely and more persistently than elsewhere.

Similar measures would have made a big difference here. One year ago, at the Institute for Public Policy Research, we argued for a similar approach in the UK, of using fiscal policy to reduce prices directly. But the call was only partly heeded, in the form of energy price support measures. While in Spain energy price caps are set to continue into next year, in the UK, the degree of support has already been lowered, covering fewer businesses than previously, and is set to end completely in autumn.

AiY(D)

Given their climate presumably they are less effected by gas prices?

[Tedx]

Why is Spain’s inflation so much lower than the UK’s? Because it stood up to business

Spain's unemployment rate is dire. It's near double the rate of the other EU27.

A recession in the UK and the resulting unemployment would bring down the UK's inflation rate. Which is why Jeremy Hunt said he was 'comfortable' with it.

[Mike4]

Why is Spain’s inflation so much lower than the UK’s? Because it stood up to business

Spain's unemployment rate is dire. It's near double the rate of the other EU27.

A recession in the UK and the resulting unemployment would bring down the UK's inflation rate. Which is why Jeremy Hunt said he was 'comfortable' with it.

So turning it around, it looks as though Mr Hunt considers a low unemployment rate to be a cause of high inflation, so measures to raise the unemployment rate are necessary. Is he right? Is it possible to have both inflation at 2% and low unemployment concurrently?

Are there ways available for a government to raise the unemployment rate, other than inducing a recession by increasing borrowing costs to businesses and consumers? Maybe controls of some sort on credit other than making it expensive? We tried that in the 60s IIRC. What happened?

[CliffEdge]

I see that the average salary of a DPD delivery driver is now 60,000 pounds pa.
Inflation ain't coming down anytime soon.

[gryffron]

I see that the average salary of a DPD delivery driver is now 60,000 pounds pa.
Inflation ain't coming down anytime soon.

Where did you get that from? Google thinks it is £24k.

Gryff

[Mike4]

I see that the average salary of a DPD delivery driver is now 60,000 pounds pa.
Inflation ain't coming down anytime soon.

Where did you get that from? Google thinks it is £24k.

Gryff

Seems highly improbable to me.

Unless these are self employed drivers supplying the vehicle too. But even then £60k seems high.

[AJC5001]

I see that the average salary of a DPD delivery driver is now 60,000 pounds pa.
Inflation ain't coming down anytime soon.

Where did you get that from? Google thinks it is £24k.

Gryff

There is an advert on the DPD app.

It says
"Owner Driver Franchise - From £50k to £60k per route
You are responsible for your own tax and insurance contributions
Self Employed
Lease and own van options available"

"Owner Driver Worker - Earn from £27k
Sick Pay
Paid holiday
Pension
Self-employed
Lease and own van options available"

"Employed Driver - Earn from £24k
DPD employee
Vehicle provided
Sick Pay
Holiday Pay
Pension
Part of a diverse and inclusive team"

Make of that what you will

Adrian

[ursaminortaur]

Where did you get that from? Google thinks it is £24k.

Gryff

There is an advert on the DPD app.

It says
"Owner Driver Franchise - From £50k to £60k per route
You are responsible for your own tax and insurance contributions
Self Employed
Lease and own van options available"

"Owner Driver Worker - Earn from £27k
Sick Pay
Paid holiday
Pension
Self-employed
Lease and own van options available"

"Employed Driver - Earn from £24k
DPD employee
Vehicle provided
Sick Pay
Holiday Pay
Pension
Part of a diverse and inclusive team"

Make of that what you will

Adrian

Is that possibly the cost of purchasing the franchise (ie a franchise to operate a particular route or area) rather than what someone would be paid ?

[Charlottesquare]

Spain's unemployment rate is dire. It's near double the rate of the other EU27.

A recession in the UK and the resulting unemployment would bring down the UK's inflation rate. Which is why Jeremy Hunt said he was 'comfortable' with it.

So turning it around, it looks as though Mr Hunt considers a low unemployment rate to be a cause of high inflation, so measures to raise the unemployment rate are necessary. Is he right? Is it possible to have both inflation at 2% and low unemployment concurrently?

Are there ways available for a government to raise the unemployment rate, other than inducing a recession by increasing borrowing costs to businesses and consumers? Maybe controls of some sort on credit other than making it expensive? We tried that in the 60s IIRC. What happened?

Phillips curve.

https://www.investopedia.com/terms/p/phillipscurve.asp