Friday, May 11, 2007
Back to back rate rises on the cards
BBC: Inflation 'pushing up pay deals'
The number of UK pay deals above 4% is picking up as level of inflation rises, according to a report from Income Data Services (IDS).
Posted by holding out @ 09:03 AM (156 views) Add Comment
15 Comments
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1. Rimmer said...
Someone recently asked me how things are very different from the 1970s and why the 50+ generation now has all the wealth, the answer if you think of it is one word.
Back in the 70s people took on large mortgages and they were harder to get, the reason the pain lasted was shorter lived and if you do the same to day Gordon didnt actually mention in his boom and bust speech that it will last a generation is that same single word.
What is that word ..............................................***** INFLATION *****
Is it a bad thing when your buying a house ? >>>> No its not.
Is it a bad thing if your starting to buy a house now ? >>>> Yes it is as the correction will be very painful
Back in the 70s the realtive outgoings were the same but people could trade up to a bigger house in a few years as their mortages as a percentage of their wages had reduced, with low inflation that takes 25 years, with zero inflation it may never happen, so who gains from Gordons low inflation >>>> You know who >>> the already very rich.
2. uncle tom said...
Our Merv is on the record as being very worried about this one - a failure to tame wage expectations forced inflation forward in the sixties, and it then took 30 years to get it back under control again.
This increases the chances of another rate hike next month.
3. tyrellcorporation said...
Quite right UT although his sentiment has yet to be backed up by actions IMHO.
I hadn't spotted this PDF on the homepage. It's dynamite, and thankfully reinforces by decision to keep the faith!
http://www.housepricecrash.co.uk/pdf/abn-amro-home-truths-04042007.pdf
Excerpt from ABN AMRO report into UK housing bubble:
Policy paralysis
The UK looks more vulnerable to a housing correction than the US. The degree of
overvaluation looks more acute, nearing 50% in the UK compared with 25% in the
US. This suggests prices need to fall further before the market re-establishes
equilibrium. In addition, supply constraints make UK house prices more likely to
‘overshoot’ than those in the US, implying greater risk of ‘spillover’ effects.
The Bank of England must take some of the blame for this situation. By cutting rates
in August 2005 when the UK housing market had cooled, the MPC reinforced
expectations that house prices can only rise. In contrast, the Fed actively tried to cool
the housing market, both through higher interest rates and its rhetoric. This has
helped reduced longer-term risks to the US economy. The BoE’s reticence could be
storing up risks in the UK.
Most worrying, the UK economy is also running a significant current-account deficit,
suggesting the pound is fundamentally too strong. If a housing downturn undermines
confidence in the currency, the MPC may find itself unable to respond. Unlike the US,
there is little evidence that exporters price in sterling to the UK market. A falling
currency could boost inflation, ruling out rate cuts in the MPC’s inflation targeting
system. This could magnify the effects of a housing market correction. But with noninterest
rate sensitive areas of the economy now performing strongly, the BoE has
the opportunity to act. A series of rate hikes in the short-term could provide the
shock to expectations needed to cool the housing market. This could mitigate those
longer-term risks without having an undue impact on broader activity.
4. talking rot said...
Uncle Tom
I respect your record of calling Interest Rate rises but this time, I think you're pushing fog uphill with a sharp stick. Yes there are risks to the UK economy but no, those risks haven't yet materialised. Wage increases may be pushing inflation up but the rapid energy price increases of last year are now falling out of the calculation - this will decrease inflation. Net result: insignificant risks on the upside and so the MPC will adopt its "Wait and See" policy again.
Max interest rates for 2007 = 5.75% by the end of the year; interest rate cuts early in 2008.
5. talking rot said...
tyrellcorporation
Nice link. Thoroughly recommendable. Have you thought about sending it to the MPC or the BoE?
6. Housesforcourses said...
talking rot - I am not so sure I agree. Whilst energy prices will drop out and reduce inflation in the short term I think there are number of other factors that will push inflation up, namely:
oil price rises - affecting petrol prices
food prices
wage rises
if interest rates dont rise then the pound will fall back thereby importing more inflation
7. royston said...
The UK property market is not the first market to think "this time it's different". The BoE are not the first policy makers to think they can maintain the top-of-boom, bloated, asset value levels as a new paradigm.
What would be a first is if they succeed!
( - personally, I'm keeping my powder dry.)
8. royston said...
"Global Insight economist Howard Archer added that a surge in pay deals had yet to materialise, as employers had been using bonuses, rather than pay rises, to reward staff."
Why are bonuses not counted in wage inflation? If bonuses lead to extra consumption and extra money chasing a near fixed housing stock, then they are a source of inflation. Do none of the measures of inflation take bonuses into account?
9. paul said...
Yes, even the most learned commentators never fail to be taken in by the "new paradigm" myth.
Well, everything we've predicted recently has now come to pass, including the inflationary surge, the social problems from overpriced housing, the crashing of the US housing market, the doubt over the MPC competence, even the recent retreat from sterling when the BofE didn't raise rates to 0.5% etc. etc.
I think we should feel rather smug. We might not be property speculators, but we can do a damn better job of predicting these things than just about anyone else around.
10. cyril said...
Bonuses are counted in the ONS statistics but wage inflation is probably a fairly meaningless statistic like the CPI.
Pay settlements are usually made up of cost of living + bonus + pay progression. So for example the civil service has given people a below-inflation 2% rise, so they will eventually have to re-grade jobs or give people promotions if they want to maintain some sort of parity with other employers in the long run.
11. Papabear said...
Yes Paul, we've predicted everything apart from, cynics would say, the actual HPC :-( In addition to the "new paradigm" yarn, the cynics would also put forward the (even more annoying) "you-guys-have-been-saying-the-market-will-crash-for-years-now-and-prices-have-actually-doubled" one. Aaaargh - UK housing market - it drives me crazy!
12. uncle tom said...
T-Rot
Nice analogy about the fog!
Yes, the rise in energy prices (as measured directly) will drop out, but the indirect effects will take some time to clear the system.
For several years we have seen high service industry inflation offset by ever cheaper imports. Those cheaper imports have stopped getting cheaper (in $) but the rise in the value of the £ has compensated.
The exchange rate of the £ vs $ is at it's highest for 26 years, and if you look at relative earnings and spending power, I am not sure the imbalance has ever been greater. This makes me believe that any further appreciation of the £ against the $ will be short-lived, or coupled to a wholesale $ collapse - in which event, export prices from China and India will either soar (in $) or be quoted in a different currency.
For the MPC, controlling inflation over the last ten years has been a turkey shoot - now it's getting a whole lot tougher...
13. sold 2 rent 1 said...
I just don't buy the return to the 1970's wage-price spiral.
We still have lots of labour coming into the country and off-shoring is still happening.
The debt levels are so much higher now so even small IR rises will begin to bite.
The MPC probably have an unofficial target of 2.9%. They know the best way out of this asset/debt bubble is to inflate it away.
I’m with TR on this one. 5.75-6.00 by the end of the year. After the stocks crash, Smithy will be calling for that “calming rate cut” by early 2008.
As for imported inflation when the GBP falls; consumption will fall at the same time and the 2 will balance each other out as far as more rate changes are concerned.
This is classic k-winter IR movement. Rise slightly then fall sharply
14. holding out said...
If GBP falls inflation will still rise because Food, Fuel etc will still be imported. Prices of other goods imported but consumed less (e.g. BMW X5s) will still be higher - until they are dropped from the basket but in the interim they will still affect inflation.
S2R1 - Does your K theory apply to GB or the world (in equal measure?).
15. sold 2 rent 1 said...
HO,
I agree that falling GBP will cause imported inflation. But if we also have falling demand then the MPC may choose to leave rates on hold as they will argue that the slowing economy will balance the inflation over the long term. Just bouncing around a few thoughts
I have been thinking about the k-winter and the different stages various countries are at:
Japan and to a lesser degree Germany have had their K-winter.
Japan’s was classic; huge property/stock market bubble followed by 15 years deflation.
Germany had falling prices in the 1980’s (beneficial deflation) followed by economic underperformance
China and many emerging economies are hitting their k-autumn peaks right now
Europe and the US hit their k-autumn peaks back in 2000
It seems clear that China, emerging economies, the US, and Europe are synchronising their cycle at this time – they are all ready for the downward plunge.
The big question is will Japan and Germany get pulled back in to the chaos or can their domestic consumption pick up enough in time.
If not then J and G will synchronise with the world and it is double k-winter and tonics all round.