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Sledgehead

Rate Rise 'may Push Inflation Higher'

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Think you have sufficient powers of reasoning to divinate the locus of our economy?

Yes? Then read this Daily Telegraph article which reports on the Ernst & Young ITEM club's view that a rate rise will actually push inflation higher. Yes, higher. Moreover, they don't just focus on the direct effects of tracker mortgage costs on the RPI. No, they say that tracker mortgage rises will cause pay boards to roll ove on wage settlements, sparking a wage price spiral.

So no rate rise, inflation up. Rate rise, inflation up. It's enough to make a deflationist tug his rug shiny.

Interest rate rise could push inflation higher, warns Item - Daily Telegraph, 18/04/2011

Edited by Sledgehead

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Think you have sufficient powers of reasoning to divinate the locus of our economy?

Yes? Then read this Daily Telegraph article which reports on the Ernst & Young ITEM club's view that a rate rise will actually push inflation higher. Yes, higher. Moreover, they don't just focus on the direct effects of tracker mortgage costs on the RPI. No, they say that tracker mortgage rises will cause pay boards to roll ove on wage settlements, sparking a wage price spiral.

So no rate rise, inflation up. Rate rise, inflation up. It's enough to make a deflationist tug his rug shiny.

Interest rate rise could push inflation higher, warns Item - Daily Telegraph, 18/04/2011

so either way we are all fooked

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they say that tracker mortgage rises will cause pay boards to roll ove on wage settlements, sparking a wage price spiral.

So no rate rise, inflation up. Rate rise, inflation up. It's enough to make a deflationist tug his rug shiny.

I've no doubt the RPI and CPI indices will continue to run at huge levels, but I can't see that driving a wage/price spiral.

Are you telling me that because all their input costs (oil, imports etc) are mushrooming that companies will somehow be MORE inclined to give pay rises?!

No, living standards will decline, because prices will rise whilst wages fall or flatline.

It is quite plausible (indeed IMHO probable) to imagine a situation over 2011-13 where house prices are plummetting and wages remain static, whilst food, fuel and clothing prices skyrocket.

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I've no doubt the RPI and CPI indices will continue ....

Are you telling me ...

No, you're the one telling. I have no idea.

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I've no doubt the RPI and CPI indices will continue to run at huge levels, but I can't see that driving a wage/price spiral.

Are you telling me that because all their input costs (oil, imports etc) are mushrooming that companies will somehow be MORE inclined to give pay rises?!

Exporters ought to be able to give rises - unlikely that they will match cost of living rises though.

Ultimately we'll see more money printing though probably not until the market has crashed again and we actually get deflation at the door once more - this will allow the government to pay out more to public sector workers.

No, living standards will decline, because prices will rise whilst wages fall or flatline.

It is quite plausible (indeed IMHO probable) to imagine a situation over 2011-13 where house prices are plummetting and wages remain static, whilst food, fuel and clothing prices skyrocket.

Overall, I would see wages rising in nominal terms but not nearly as fast as the cost of living leading to a real-terms cut for most people and as you say, falls in the standard of living for the masses. The banksters should do very nicely for themselves though and that's what really matters.

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There is a news article that manufacture pay deals are flat. They are not responding to inflation. In addition divs by companies are up on last year back to 2008 levels. Another report suggests companies are hoarding cash

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Think you have sufficient powers of reasoning to divinate the locus of our economy?

Yes? Then read this Daily Telegraph article which reports on the Ernst & Young ITEM club's view that a rate rise will actually push inflation higher. Yes, higher. Moreover, they don't just focus on the direct effects of tracker mortgage costs on the RPI. No, they say that tracker mortgage rises will cause pay boards to roll ove on wage settlements, sparking a wage price spiral.

So no rate rise, inflation up. Rate rise, inflation up. It's enough to make a deflationist tug his rug shiny.

Interest rate rise could push inflation higher, warns Item - Daily Telegraph, 18/04/2011

Interest rates have always been a crap way to control the economy. They are too indiscriminate with the sections of the market that they do hit directly and completely miss anyone who is not carrying any debt (until the higher cost of other people's borrowing filters through as inflation).

I have posted here before about the use of carefully directed taxation and the way that various governments have succeeded in removing this weapon from their arsenal. Political manoeuvring in order to win votes has put us in a position where the economy really cannot be controlled by any government that wishes to have any chance of winning a second term.....and that's our fault. We fell for the con trick that is the promise of low taxes and we have a situation now were the use of the only other tool would break the back of our fragile economy due to the massively high level of personal debt.

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Think you have sufficient powers of reasoning to divinate the locus of our economy?

Yes? Then read this Daily Telegraph article which reports on the Ernst & Young ITEM club's view that a rate rise will actually push inflation higher. Yes, higher. Moreover, they don't just focus on the direct effects of tracker mortgage costs on the RPI. No, they say that tracker mortgage rises will cause pay boards to roll ove on wage settlements, sparking a wage price spiral.

So no rate rise, inflation up. Rate rise, inflation up. It's enough to make a deflationist tug his rug shiny.

Interest rate rise could push inflation higher, warns Item - Daily Telegraph, 18/04/2011

This article reeks of intellectual desperation. How can they look themselves in the mirror after publishing this crap.

UK dividend payouts are supposed to grow by 13% this year, just shy of record levels, yet UK firms can't possibly tolerate interest rates any higher than the current 300 year record lows? This is such complete non-sense.

In any case, if the UK doesn't raise interest rates, then inflation really will take off, as the ECB raises euro rates and the US ends QE2, the pound falls more in value, and imports become even more pricey. Relatively speaking, if other currencies are seeing interest rates rise, then keeping rates in the UK at the same level is the equivalent of the MPC lowering interest rates.

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April fools day used to be on a good, grounded 1

now its 18th.

theres inflation for you.

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I've no doubt the RPI and CPI indices will continue to run at huge levels, but I can't see that driving a wage/price spiral.

Are you telling me that because all their input costs (oil, imports etc) are mushrooming that companies will somehow be MORE inclined to give pay rises?!

No, living standards will decline, because prices will rise whilst wages fall or flatline.

It is quite plausible (indeed IMHO probable) to imagine a situation over 2011-13 where house prices are plummetting and wages remain static, whilst food, fuel and clothing prices skyrocket.

Very plausible, that is how I can see it panning out. ;)

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It is quite plausible (indeed IMHO probable) to imagine a situation over 2011-13 where house prices are plummetting and wages remain static, whilst food, fuel and clothing prices skyrocket.

Who needs to imagine; it's happening right now.

North of Watford Gap, anyway. ;)

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Telegraph: Interest rate rise could push inflation higher, warns Item

Raising interest rates too soon could actually worsen Britain's inflation problem, according to the Ernst & Young Item Club, which has identified a "perverse" danger tied to an early move.

By Emma Rowley 6:00AM BST 18 Apr 2011

With the headline rate of inflation double the target at 4pc, many in the markets believe the Bank of England could raise rates from their record low as soon as next month, in a bid to rein in rising prices.

However, doing so risks triggering the feared "wage price spiral", the vicious circle where attempts to keep people's pay in line with rising prices push inflation even higher, Item has argued.

The knock-on effect of a rate rise on mortgage payments, as well as putting pressure on households, could force wages to finally start climbing at the wrong time, the group of economists fears.

The problem is that an increase in the Bank's base rate would quickly boost interest payments on tracker mortgages, which are included the retail prices index (RPI) measure of inflation - often used as the basis of wage settlements.

"It seems unlikely, but ironically this could… prove to be the last straw for wage settlements, persuading employers that the workforce needed a pay increase to compensate," Item said in its quarterly forecast report, published on Monday.

With RPI inflation already at 5.3pc, the rate could "easily" climb past 6pc if mortgage payments follow the path of interest rates, said Peter Spencer, Item's chief economist adviser.

"We are of the view there would be a wage-price spiral because… this could be just the straw that breaks the camel's back," he said. "If RPI went to 6pc, it would put extraordinary pressure on wage settlers to concede to demands."

So far wages have been rising much more slowly than inflation, which although painful for workers has alleviated worries about the risk of prices spiralling out of control, since the squeeze on households is keeping demand weak.

Item called for the Bank of England to hold off from a rate rise until November, when the group thinks inflation will be about to fall quite sharply, as the effects of the recent VAT rise and other factors drops out. Since inflationary pressures would be less, a rate rise then would lessen the risk of a wage price spiral developing, it is thought.

Item also said that Britain's future is under threat if businesses do not loosen their purse strings and start to spend some of their spare cash.

"Companies are swimming in cash while consumers are drowning in debt," Item said. The situation has become "even more polarised" since Item highlighted the problem a year ago, with the surplus, or cash pile, that non-financial companies are sitting on now at £71bn.

However, the wrong move from the Bank of England could put paid to hopes of the corporate sector riding to the rescue, the group believes.

"Companies hold the key to this recovery and a hasty hike in interest rates could break this key in the lock," said the group. "It [the Bank] could find itself reversing policy next year if the economy double-dips and the inflation rate falls below target."

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"as soon as next month" :blink: - it's been at the "emergency" low level of 0.5% for over two years. FFS.

"interest payments on tracker mortgages, which are included the retail prices index (RPI) measure of inflation" - so the economic tool traditionally used to control inflation - interest rates - is included in the price of inflation? is that right? :blink: - has this always been the case? or is it something else that Brown implemented on his first day in office in 1997?

"if mortgage payments follow the path of interest rates" - "IF"? WTF??

"until November, when the group thinks inflation will be about to fall quite sharply, as the effects of the recent VAT rise and other factors drops out" - An assumption made on what basis exactly?

"Britain's future is under threat if businesses do not loosen their purse strings and start to spend some of their spare cash" ... umm... I hate to be the bearer of bad news...

"if the economy double-dips and the inflation rate falls below target" - Below target? BELOW TARGET?!! Merv, get the soap out: someone needs their mouth washing.

Granted, it's been 15 years since I took A-Level Economics but one things for sure: had I submitted that analysis in my exam I would have gotten a big fat F.

And possibly a job in the City of London.

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This all seems like complete sense to me.

Money supply (not the monetary base) in the UK is negative and the velocity of money (GDP) was negative last quarter and probably won't be going great guns when they report the latest quarter. So there is little evidence for inflation to be driven internally in the UK. So IMHO its all external cost-push driven.

Given this, I personally don't think the small advantages (that an increase in the base rates would make to the trading value of sterling) would have come close to outweighing the massive deflationary pressure that would come from the problems companies, the govt and the public would have from the increased debt-servicing costs.

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I don't think we will get a rate rise until the end of the year at the earliest. At the end of last year it looked like a good move to me, things have changed.

The problem is not our own Economy which has been showing considerable strength (despite what the media VI's will tell you). Trade, Jobs etc.

I think it is quite likely there will be another crisis stemming from Europe. The Germans appear to have gone mad, forcing huge Austerity on to economies in southern Europe that were already in recession and massive debt. Now a plan to raise interest rates possibly by another 0.5% this year. Total insanity that will lead to a European banking crisis and a proper double dip on the continent if not here as well.

No way can we raise rates until the European crisis has a workable solution, it would be suicide and would probably be reversed inside 6 months.

We will have to wait a while yet for extra pressure to be brought to bear on HP unfortunately.

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This all seems like complete sense to me.

Money supply (not the monetary base) in the UK is negative and the velocity of money (GDP) was negative last quarter and probably won't be going great guns when they report the latest quarter. So there is little evidence for inflation to be driven internally in the UK. So IMHO its all external cost-push driven.

Given this, I personally don't think the small advantages (that an increase in the base rates would make to the trading value of sterling) would have come close to outweighing the massive deflationary pressure that would come from the problems companies, the govt and the public would have from the increased debt-servicing costs.

Perhaps you would like to check what you have just typed?

Of course money supply cannot be a negative number. M4 growth has been slightly negative, but still way up from 2007 and our economy is still about 4.6% smaller

in real term compared to 2007. So M4 is 10% higher, economy 4.6% smaller. We have about 15% inflation since 2007 (RPI 5% ish for last 3 years).

GDP is not velocity of money and velocity of money cannot be negative. If nobody spend a single penny in the economy, the velocity is 0 and that cannot get

any worse. Also, GDP cannot be -ve, GDP REAL growth was negative last quarter. Nominally, the economy is about 4% bigger.

I would think a higher rate forcing the speculators to liquidate would be quite deflationary although I agree here that IR is a blunt tool and it will also

hit the innocent (but then it is not BoE job to pick winners...)

Ref 1 : M4 Table

30 Nov 08 1908328

31 Dec 08 1937220

31 Jan 09 1969523

28 Feb 09 1991472

31 Mar 09 2010496

30 Apr 09 1979814

31 May 09 1982440

30 Jun 09 1977395

31 Jul 09 1986288

31 Aug 09 1988227

30 Sep 09 2009158

31 Oct 09 2060133

30 Nov 09 2056553

31 Dec 09 2041871

31 Jan 10 2209198

28 Feb 10 2209412

31 Mar 10 2219562

30 Apr 10 2213318

31 May 10 2200574

30 Jun 10 2200028

31 Jul 10 2200053

31 Aug 10 2173957

30 Sep 10 2182875

31 Oct 10 2187288

30 Nov 10 2176719

31 Dec 10 2157647

31 Jan 11 2151023

28 Feb 11 2144737

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Guest spp

Unless you have your cash in a physical inflation politician/bankster proof asset and I ain't talking houses here.

better?

Edited by spp

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Think you have sufficient powers of reasoning to divinate the locus of our economy?

Yes? Then read this Daily Telegraph article which reports on the Ernst & Young ITEM club's view that a rate rise will actually push inflation higher. Yes, higher. Moreover, they don't just focus on the direct effects of tracker mortgage costs on the RPI. No, they say that tracker mortgage rises will cause pay boards to roll ove on wage settlements, sparking a wage price spiral.

So no rate rise, inflation up. Rate rise, inflation up. It's enough to make a deflationist tug his rug shiny.

Interest rate rise could push inflation higher, warns Item - Daily Telegraph, 18/04/2011

Hmmm let me think is that because interest rate policy is a complete rip off?

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I don't think we will get a rate rise until the end of the year at the earliest. At the end of last year it looked like a good move to me, things have changed.

The problem is not our own Economy which has been showing considerable strength (despite what the media VI's will tell you). Trade, Jobs etc.

I think it is quite likely there will be another crisis stemming from Europe. The Germans appear to have gone mad, forcing huge Austerity on to economies in southern Europe that were already in recession and massive debt. Now a plan to raise interest rates possibly by another 0.5% this year. Total insanity that will lead to a European banking crisis and a proper double dip on the continent if not here as well.

No way can we raise rates until the European crisis has a workable solution, it would be suicide and would probably be reversed inside 6 months.

We will have to wait a while yet for extra pressure to be brought to bear on HP unfortunately.

Isn't it funny that there are 101 people on this forum that blame Gordon Brown for the Credit Crunch but if we get a double dip it won't be Cameron's fault. It will be down to those beastly Germans (and probably still Gordon Brown)

Anyone who thinks our economy is showing strength, let alone considerable strength, is not looking where I'm looking.

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Isn't it funny that there are 101 people on this forum that blame Gordon Brown for the Credit Crunch...

I think you have this confused. He is not blamed for the Credit Crunch; this was an inevitable consequence of the Credit Boom. He is largely blamed for intentionally creating an environment that encouraged and fuelled an incredibly destructive, unregulated and unrestrained credit bubble in the UK. Brown created the environment (on his very first day in the job no less!) - 1997: Brown sets Bank of England free - and Brown created the demand - 2002: Pension blame falls on Brown.

Some blame Gordon Brown personally for this; others believe him to be a mere puppet carrying out the orders of those who really run the country. I would agree with the latter. He did, after all, invoke the above on his very first day in office and yet there was no mention of his intentions during the election campaign. Odd, don't you think.

... but if we get a double dip it won't be Cameron's fault. It will be down to those beastly Germans (and probably still Gordon Brown)

That may be mattyfc's opinion but from what I read on this forum it doesn't represent the views of many others on this site.

Anyone who thinks our economy is showing strength, let alone considerable strength, is not looking where I'm looking.

I completely agree.

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Just stumble on this:

Sixteen Cents: Pushing the Unstable Limits of Monetary Policy

http://webcache.googleusercontent.com/search?q=cache:m7YoPooLzU8J:www.hussmanfunds.com/wmc/wmc110124.htm+hussman+fund+16cents&hl=en&gl=uk&strip=1

who argues that raising interest rate while maintaining current monetary base is inflationary.

The basic premise is that people are willing to hold nearly no interest paying papers (e.g. cash/base money) when short term rates are low,

else they will use it to buy something else (err.. yield carrying financial product that is). This drives velocity as people don't want to hold

cash and want to 'buy something (financial thing, that is).

Quite counter intuitive as people are more willing to consume / less willing to save when rates are low - he is talking about liquidity preference but does not take

into account time preference.

So, creates lots of money and hold short term rates low will create no inflation - from monetary stand point.

To be fair, he does say the unproductive government spending is the one that is driving inflation (e.g. Germany paying striking workers at Ruhr - which

was part of the trigger of the Weimar hyperinflation)

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  • 312 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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