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Inflation Expectations Jump To A Two Year High

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3.9% now. .

Is a rate rise already too late? Had merv lost control? and this was before anyone knew of this weeks surprise unexpected increase in inflation.

Inflation expectations hit 2-year high in November - BoE

Thu Dec 16, 2010 9:55am GMT

LONDON (Reuters) - Britons expect a higher rate of inflation over the coming year than at any time since August 2008, suggesting concern about a looming sales tax rise and rising food prices, a Bank of England survey showed on Thursday.

The Bank's November inflation attitudes survey showed that the public expect inflation of 3.9 percent over the next 12 months, up from an expected 3.4 percent in August and the highest rate since August 2008.

Inflation has been at least a percentage point above the Bank's 2 percent target since the start of the year, due in part to a rise in value-added tax in January as well as high commodity prices. Last month consumer price inflation unexpectedly rose to a six-month high of 3.3 percent due to record increases in food and clothing prices.

A further rise in VAT is due next month, and the Bank itself expects inflation of well over 3 percent next year before it falls back to target early in 2012.

Respondents in the Bank's survey said they expected inflation in two years time be 3.2 percent and in five years time to be at 3.3 percent -- the highest forecasts for these measures since the Bank first asked about them in February 2009.

The Bank had not previously made the answers to these questions public.

Bank Deputy Governor Charles Bean said earlier this week that the central bank was keeping a very close eye on inflation expectations in case they triggered a spiral of pre-emptive price rises and wage demands that could stop inflation falling.

The survey was carried out by polling company GfK NOP between November 11 and November 16, and interviewed 2,057 people.

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A recent money week article showed that in order for confidence to be restored in a fiat currency, and to stop the fall of that currency versus gold, you need positive real interest rates. Not only that, but you need positive real interest rates of 6% to have a 100% successful impact and persuade people your fiat currency is a seriously better option than gold (or other alternate stores of wealth). Note on the graph that it is not until real rates of 6% are achieved that the points on the graph suddenly all fall into negative territory, rather than being evenly distributed in the 4-6% range.

I have attached the graph to support this. It plots gold price increase/decreases across 381 rolling 12 month periods versus average interest rates during those 12 month periods.

If we add 6% to the RPI at 4.7%, to give us positive 6% returns we get 10.7%. However, banks need to offer savers a lower interest rate than borrowers, or they can't make money, so in reality 6% real rates would need to be around at least 12%.

A 12% interest rate is a 24x increase from the current base rate. Not good news if you're on an IO tracker.

Can anyone tell me if our housing market, and as a result, banks, could withstand this, without imploding?

Expect to see a lot more inflationary policy, until the bond markets say no and force interest rates up. That's when this crisis goes from being benign to terminal.

Gold price and interest rates.gif


Edited by General Congreve

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