Inflation

[Quokka]

http://news.independent.co.uk/business/new...ticle308775.ece

I've thought for a while we may see a correction in house prices via inflation rather than price falls, as happened in the 70's. With oil prices on the rise again maybe history is repeating itself.

Any thoughts on this?

[cgnao]

Yes, buy gold. It went from $35/ounce in 1971 to $850/ounce in 1980.

[right_freds_dead]

i bought myself some gold bars a few months ago. recently i thought i looked foolish. however, since then i have learned to dance around the bars, possibly doing a twist or at the least the mashed potato.

i dont know if its the dance or what, but the value has gone up since.

[GCS15]

i bought myself some gold bars a few months ago. recently i thought i looked foolish. however, since then i have learned to dance around the bars, possibly doing a twist or at the least the mashed potato.

i dont know if its the dance or what, but the value has gone up since.

<{POST_SNAPBACK}>

The dance for sure

[Quokka]

Yes, buy gold.  It went from $35/ounce in 1971 to $850/ounce in 1980.

<{POST_SNAPBACK}>

But hasn't it been dumped by state banks since then?

e.g. BOE

[planit]

But hasn't it been dumped by state banks since then?

e.g. BOE

<{POST_SNAPBACK}>

They can only do it once and it was priced in a few years ago. If people get scared of other investments they will chase the price up.

[Warwickshire Lad]

Any thoughts on this?

<{POST_SNAPBACK}>

To bring the P/E ratio in the housing market all our wages have to double, near enough - a 200% rise in our salaries.

In the 1970s, inflation was running at over 20% a year. Even if house prices stand still it would surely take a number of years at that rate before we are back to 3.5x salary again - remember house prices in real terms have never been more expensive than they are now.

If oil sets of an inflationary spiral as Mervyn King is suggesting then surely IRs are going to have to shoot up as well in the shorter term.

This would surely cause a collapse in nominal prices first, say by about 25-30%, and then the subsequent rampant inflation causing the rest of the real-terms falls over the next several years whilst nominal prices languish.

Perhaps the eventual split will be 50/50.

[since the beginning]

He argued that because consumers are so used to price stability, the risk is that they would overreact if the economy was hit by a big shock. Mr King has warned in the past that an oil price spike or an asset bubble could amount to such a shock.

How do consumers over-react to an inflation shock?

[Guest Charlie The Tramp]

In the 1970s, inflation was running at over 20% a year.

1979 13.4% 3.2

1978 8.3% 3.6

1977 15.8% 3.9

1976 16.5% 4.6

1975 24.2% 5.3

1974 16.0% 6.6

1973 9.2% 7.7

1972 7.1% 8.4

1971 9.4% 8.9

1970 6.4% 9.8

To compare prices with today monetary wise, the four bed detached house I bought in 1975 would cost just 100k today.

Edited August 29, 2005 by Charlie The Tramp

[BuyingBear]

1979 13.4% 3.2

1978 8.3% 3.6

1977 15.8% 3.9

1976 16.5% 4.6

1975 24.2% 5.3

1974 16.0% 6.6

1973 9.2% 7.7

1972 7.1% 8.4

1971 9.4% 8.9

1970 6.4% 9.8

<{POST_SNAPBACK}>

Very interesting, and this was before rigged CPI data too, central banks love CPI because if something goes up in cost it means that its weighting goes down in the index and makes the headline figure look more acceptable. Unfortunately because oil is so elemental everything is going up in cost, so unless they make a Chinese DVD player (or t-shirt, he he) 90% of the index they cannot possibily disguise the increases. Understating CPI also lets the govt get away with pitiful increases in the state pension and such like (48p?).

Remember, if you understate inflation you overstate GDP growth. We may already be in something like stagflation where any growth, especially in the money supply, is just absorbed in prices without any significant real growth in the economy.

In the US over recent years the only jobs created, in what was otherwise a jobless recovery, were in construction and the retail sector 3m manufacturing jobs have disappeared in that time.

The majority of job and wage growth in the UK has been in the public sector, whether you believe this was justified or not, it doesn't change the fact this now forms a significant part of the government deficit, which will lead to higher rates and taxes and/or a decline in sterling if left unchecked, add in a trillion or two for unfunded pensions and there's a problem.

The central banks have got themselves in such a hole I think they're just going to let rip on inflation, if they keep digging fast enough eventually they'll hit China, in every sense.

Now, how do you let real inflation hit 10%, pretend it isn't happening, keep IR low whilst simultaneously stopping your currency from collapsing and keeping rioting pensioners and workers off the streets when they find their income has gone up by 3% and their electric bill alone by 30%?

For those on the margins it's going to make the welfare state seem even more attractive in terms of income and housing, and what is that going to do for government coffers?

Edited August 29, 2005 by BuyingBear

[Guest Charlie The Tramp]

Very interesting

It becomes even more interesting when you look at interest rates through that period.

Surprising the effect stagflation had at the time.

The red figure shows where they reduced one month realised their mistake and put them back up the following month.

Bank Repo Rate

1970 5 Mar 7.5000

15 Apr 7.0000

1971 1 Apr 6.0000

2 Sep 5.0000

1972 22 Jun 6.0000

Min.Lending Rate

1972 16 Oct 7.2500

30 Oct 7.5000

4 Dec 7.7500

11 Dec 8.0000

27 Dec 9.0000

1973 22 Jan 8.7500

26 Mar 8.5000

16 Apr 8.0000

24 Apr 8.2500

14 May 8.0000

21 May 7.7500

25 Jun 7.5000

23 Jul 9.0000

30 Jul 11.5000

22 Oct 11.2500

13 Nov 13.0000

1974 7 Jan 12.7500

4 Feb 12.5000

8 Apr 12.2500

16 Apr 12.0000

28 May 11.7500

23 Sep 11.5000

1975 20 Jan 11.2500

27 Jan 11.0000

10 Feb 10.7500

17 Feb 10.5000

10 Mar 10.2500

24 Mar 10.0000

21 Apr 9.7500

5 May 10.0000

28 Jul 11.0000

6 Oct 12.0000

17 Nov 11.7500

1 Dec 11.5000

29 Dec 11.2500

1976 5 Jan 11.0000

19 Jan 10.7500

26 Jan 10.5000

2 Feb 10.0000

9 Feb 9.5000

1 Mar 9.2500

8 Mar 9.0000

26 Apr 10.5000

24 May 11.5000

13 Sep 13.0000

7 Oct 15.0000

22 Nov 14.7500

20 Dec 14.5000

29 Dec 14.2500

1977 10 Jan 14.0000

24 Jan 13.2500

31 Jan 12.2500

3 Feb 12.0000

10 Mar 11.0000

21 Mar 10.5000

31 Mar 9.5000

12 Apr 9.2500

18 Apr 9.0000

25 Apr 8.7500

2 May 8.2500

16 May 8.0000

8 Aug 7.5000

15 Aug 7.0000

12 Sep 6.5000

19 Sep 6.0000

10 Oct 5.5000

17 Oct 5.0000

28 Nov 7.0000

1978 9 Jan 6.5000

12 Apr 7.5000

8 May 8.7500

15 May 9.0000

8 Jun 10.0000

9 Nov 12.5000

1979 8 Feb 14.0000

1 Mar 13.0000

5 Apr 12.0000

13 Jun 14.0000

15 Nov 17.0000

Edited August 29, 2005 by Charlie The Tramp

[Sledgehead]

TTRTR notable for his absence on this thread. He usually has so much to say about the interest rate outlook.

[BuyingBear]

TTRTR notable for his absence on this thread. He usually has so much to say about the interest rate outlook.

<{POST_SNAPBACK}>

I thought he was out in the Caribbean planning his next purchase?