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Ultra-low Interest Rates Here To Stay After Inflation Falls Below Government Target

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http://www.guardian.co.uk/business/2009/ju...vernment-target

Cheaper food and soft drinks helped push the annual rise in the cost of living down to 1.8% from 2.2%, according to the Office for National Statistics

The City was braced tonight for a prolonged period of ultra-low interest rates after a combination of a slowing economy and cheaper food prices dragged Britain's inflation rate below the government's target for the first time in almost two years.

Analysts said the drop from 2.2% to 1.8% in the cost of living as measured by the consumer prices index (CPI) took the pressure off the Bank of England to reverse the policy stimulus that has been in place since the turn of the year.

With the broader measure of inflation, the retail price index, recording a 1.6% fall in the year to June, the newest member of the Bank's nine-strong monetary policy committee said that he was more concerned about undershooting the 2% CPI target than overshooting it.

"The risks clearly are more about deflation than inflation in the short term," Adam Posen said in testimony to the Commons Treasury committee.

Inflation has not been below the government's target since September 2007, the month of the run on Northern Rock in the early stages of the global financial crisis. It peaked at 5.2% last September in the wake of the sharp increase in oil prices and despite last month's fall remains higher than the average of 0.7% for the 27 nations in the European Union and -0.1% for the 16-country eurozone.

Howard Archer, chief UK economist at IHS Global Insight, said: "The June inflation data broadly reinforce our belief that the Bank of England can afford to keep interest rates down at 0.5% well into 2010. The data also do little to dilute our belief that the Bank of England could very well increase its quantitative easing programme in August despite its inaction at its July MPC meeting, particularly if economic and bank lending data disappoint over the coming month."

The main factor behind the lower inflation rate was food and non-alcoholic drinks, which fell to 5.4% last month, from 7.8% in May. The furniture sector also pulled down CPI, with the trend of retailers increasing prices before the summer sales becoming less apparent since the collapse of MFI.

Retail price inflation, which strips out housing costs, fell from -1.1% in May to -1.6% in June, its lowest level since 1948.

Brendan Barber, the TUC general secretary, said: "The severe drop in both main measures of inflation shows how close the UK economy is to a deflationary phase. This would have a very serious impact on jobs, growth and investment.

"There is a strong political consensus behind the Bank of England's bold measures to limit this risk, but it is illogical to argue simultaneously for massive cuts in public spending."

An excellent article to encourage people to borrow money, why not especially if ultra low interest rates are going to be here for a long time. Obviously you need to ignore the fact that fix rate deals are increasing, and the fact if deflation kicks in debts a real killer, if you do that borrow as much as you can because nothing can go wrong.

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http://www.guardian.co.uk/business/2009/ju...vernment-target

An excellent article to encourage people to borrow money, why not especially if ultra low interest rates are going to be here for a long time. Obviously you need to ignore the fact that fix rate deals are increasing, and the fact if deflation kicks in debts a real killer, if you do that borrow as much as you can because nothing can go wrong.

and even when they do go up they won't go up to their previous highs of the last interest rate cycle for a very very long time.

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I am a big believer in the law of unintended consequences.

While I don't claim to know what will happen next, I fear that the entire deleveraging process will result in significantly higher real interest rates as debt continues to pass from a diversified private sector to a concentrated public sector. The lack of diversification significantly increases "event risk".

Even if inflation falls, the increase in real rates might be enough to overwhelm falling inflation which also results in higher nominal rates.

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I am a big believer in the law of unintended consequences.

While I don't claim to know what will happen next, I fear that the entire deleveraging process will result in significantly higher real interest rates as debt continues to pass from a diversified private sector to a concentrated public sector. The lack of diversification significantly increases "event risk".

Even if inflation falls, the increase in real rates might be enough to overwhelm falling inflation which also results in higher nominal rates.

fiddle fiddle fiddle - election soon - join dots

dont need to be einstein to see the illusion the magic money tree makes

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fiddle fiddle fiddle - election soon - join dots

dont need to be einstein to see the illusion the magic money tree makes

I am not trying to be snarky with my question ....

I am a mere probabilistic mortal ... I would love to understand the deterministic Einstein view so that I can ignore some parts of the eventual distribution of outcomes that I currently expect as I am sure that I am wasting resources protecting against outcomes that are unlikely ......

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From the linked article :

Retail price inflation, which strips out housing costs,

Really? is that RPI, or RPIX the author was referring to. "Retail price inflation" looks like RPI to me. It's confusing at best.

I wonder about the quality of financial journalism out there sometimes.

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I am not trying to be snarky with my question ....

I am a mere probabilistic mortal ... I would love to understand the deterministic Einstein view so that I can ignore some parts of the eventual distribution of outcomes that I currently expect as I am sure that I am wasting resources protecting against outcomes that are unlikely ......

your guess is as good as mine once the qe and zirp has to go, but while that switch is on in the run up to an election no one should be surprised to see that money talks

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The price of essentials is skyrocketing. No one sensible is buying anything else, so squaring off high essentials against such things such as dog shampooing which I'm not buying looks like gaming the figures to me.

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The price of essentials is skyrocketing. No one sensible is buying anything else, so squaring off high essentials against such things such as dog shampooing which I'm not buying looks like gaming the figures to me.

The figures are all rigged to make us feel better.

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All depends on what numbers you look at. Taken on a month by month basis inflation is clearly on the up.

June CPI index 111.0

up 0.3 on May

up 2.3 since Jan

average monthly increase since Jan 0.3%

June RPIX index 212.6

up 0.6 on May

up 5.1 since Jan

average monthly increase since Jan 0.5%

June RPI index 213.4

up 0.6 on May

up 3.3 since Jan

average monthly increase since Jan 0.3%

And looking at the RPI figures in more detail:

2008 May 215.1

2008 Jun 216.8

2008 Jul 216.5

2008 Aug 217.2

2008 Sep 218.4

2008 Oct 217.7

2008 Nov 216.0

2008 Dec 212.9

2009 Jan 210.1

2009 Feb 211.4

2009 Mar 211.3

2009 Apr 211.5

2009 May 212.8

2009 Jun 213.4

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All depends on what numbers you look at. Taken on a month by month basis inflation is clearly on the up.

June CPI index 111.0

up 0.3 on May

up 2.3 since Jan

average monthly increase since Jan 0.3%

June RPIX index 212.6

up 0.6 on May

up 5.1 since Jan

average monthly increase since Jan 0.5%

June RPI index 213.4

up 0.6 on May

up 3.3 since Jan

average monthly increase since Jan 0.3%

And looking at the RPI figures in more detail:

[...]

RPI is 25% made up of housing costs, 13% motoring and maybe 20% services/utilities :unsure:

If you are on a low income or a pensioner you may not spend as much on these things :huh:

CPI is pretty stubbornly rising though apparently food fell this month :(

Its CPI you see in the supermarket, so you see prices rising ;)

I see deflationary risk in the short-medium term being greater than inflationary risk (barring another sell off in the pound maybe :o )

What i dont know is what the longer term looks like? :blink:

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All depends on what numbers you look at. Taken on a month by month basis inflation is clearly on the up.

June CPI index 111.0

up 0.3 on May

up 2.3 since Jan

average monthly increase since Jan 0.3%

June RPIX index 212.6

up 0.6 on May

up 5.1 since Jan

average monthly increase since Jan 0.5%

June RPI index 213.4

up 0.6 on May

up 3.3 since Jan

average monthly increase since Jan 0.3%

And looking at the RPI figures in more detail:

2008 May 215.1

2008 Jun 216.8

2008 Jul 216.5

2008 Aug 217.2

2008 Sep 218.4

2008 Oct 217.7

2008 Nov 216.0

2008 Dec 212.9

2009 Jan 210.1

2009 Feb 211.4

2009 Mar 211.3

2009 Apr 211.5

2009 May 212.8

2009 Jun 213.4

Doesn't the oil price have a lot to do with it? Oil was $148 a barrel last July but in Jan must have been around $30 so costs have increased since Jan?

Edited by Redhat Sly

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One thing has occurred to me re index linked pensions. My pension (Local Government) is linked to RPI from September to September. It now looks quite probable that by September the annual "increase" could be negative. I'm wondering if I'm going to get a pay cut - I can't find anything in the rules about this - it's always called "Pensions Increase".

Anybody know the answer?

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One thing has occurred to me re index linked pensions. My pension (Local Government) is linked to RPI from September to September. It now looks quite probable that by September the annual "increase" could be negative. I'm wondering if I'm going to get a pay cut - I can't find anything in the rules about this - it's always called "Pensions Increase".

Anybody know the answer?

Write to your board of trustees, it should be covered in the trust deed

Often their clauses (that nobody expected to use) that cover the event of deflation

(Note: this advice applies on private sector pensions, might be different for local government)

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