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doogie

The Economist: Global Inflation

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One for the blog:

http://www.economist.com/opinion/displaySt...tory_id=5056320

Plenty for the bears here:

But the rise in crude oil prices over the past few years has largely reflected strong global demand rather than a disruption to oil supply, and the futures markets think that most of the rise is permanent. If so, it will eventually affect core inflation. Moreover, the headline inflation rate, including oil, matters because it is the one that consumers experience, and so can influence inflation expectations and wage claims.

Mervyn King, the governor of the Bank of England, gave warning last week that monetary policy must focus on inflation and can do little to counter the slowdown.

If house prices and consumer spending stumble, neither should central bankers slash interest rates as it is now widely expected that they would do. As long as inflation remains well above central banks' desired targets, they would be wrong to cut rates. That would be to turn a blind eye to history. The bitter experience of the 1970s shows that the first signs of rising inflation should never be ignored.

...and a titbit for the bulls too:

In Britain, where spending has slowed sharply over the past year, rising inflation is more likely to delay rate cuts than to trigger an increase.

Edited by doogie

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Global Inflation, The scourge returns

I think it's a bit harsh to call inflation a "scourge". Without inflation there would be no incentive for people to invest and increase the productivity of the economy; it also allows prices which are sticky downwards (wages, house prices) to be re-adjusted to a more reasonable level without major societal unrest and upheaval. Ask Japan whether they would like some of this "scourge" and they will positively bite your arm off. Inflation is the grease which oils the wheels of the economy. It's only when it gets to ridiculous levels (50%+ per annum) that seriously negative consequences ensue.

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Without inflation there would be no incentive for people to invest and increase the productivity of the economy

That's odd. Because we had deflation for most of the history of civilisation... didn't seem to do much harm then.

Ask Japan whether they would like some of this "scourge" and they will positively bite your arm off.

Who is 'Japan'? You think a nation is a person?

Do you really think that if you asked a typical Japanese person whether they wanted inflation, they'd say 'yes'? I guess maybe if they were a mortgaged with huge negative equity, but those who don't have big debts benefit hugely from deflation.

Equally, would you prefer that there was no deflation in IT and your computer cost 10,000,000 pounds?

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I think it's a bit harsh to call inflation a "scourge". Without inflation there would be no incentive for people to invest and increase the productivity of the economy; it also allows prices which are sticky downwards (wages, house prices) to be re-adjusted to a more reasonable level without major societal unrest and upheaval. Ask Japan whether they would like some of this "scourge" and they will positively bite your arm off. Inflation is the grease which oils the wheels of the economy. It's only when it gets to ridiculous levels (50%+ per annum) that seriously negative consequences ensue.

that is a very challenging point of view.

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Inflation is like many things in life. Good in small amounts as it encourages people to buy goods and services. Too much and it can be damaging to an economy as the currency looses credibility. At what point it eases to be a good thing is a tough call to make. It seems the UK has opted for an upper limit of about 3%. May be that right, may be it is not. The important thing, however, is that once you have set a target value, you stick to it. If you do not you risk loosing credibility. If the credibility of your central bank is lost then there is a good chance the same will happen to your currency.

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Good in small amounts as it encourages people to buy goods and services.

Why is discouraging saving a good thing? If interest rates were set by the market rather than government, do you really think we'd have inflation?

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I think it's a bit harsh to call inflation a "scourge". Without inflation there would be no incentive for people to invest and increase the productivity of the economy; it also allows prices which are sticky downwards (wages, house prices) to be re-adjusted to a more reasonable level without major societal unrest and upheaval. Ask Japan whether they would like some of this "scourge" and they will positively bite your arm off. Inflation is the grease which oils the wheels of the economy. It's only when it gets to ridiculous levels (50%+ per annum) that seriously negative consequences ensue.

Every now and then someone makes sweeping statements that, for some reason, go unchallenged - i.e. seem to be accepted.

'Without inflation there would be no incentive for people to invest and increase the productivity of the economy;' .... balderdash in my opinion. Imagine an economy where, for example, it was against the law to raise prices (memories of a prices and incomes policy). Businesses would simply have to invest to improve efficiency if they wanted to increase their margins.

Inflation is a scourge. I imagine from your comments you are young and have no experience of living in an economy with high inflation. Some on here mention the erosion of debt - a handy by-product of inflation. What they don't mention is that when prices are rising at say 10% a year, it is very hard to get a 10% pay-rise to cover them and, because of tax, you actually need a 15% pay rise just to stand still. The reason successive governments since the 70s have been determined to stamp inflation out (or down to manageable levels) is because it is a scourge. Also, of course, you soon find your export markets disappear if you keep having to put the price of your goods up every year. This is one of the reasons why our manufacturing industry has been decimated.

Deflation is a scourge - which is why the BOE have a target of 2% inflation. Nicely manageable. Deflation means people put off buying things in the expectation they will be cheaper tomorrow.

'Inflation is the grease which oils the wheels of the economy'. Grease? Oil? Surely oil oils things? But, anyway, the statement is drivel.

Edited by Marina

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Why is discouraging saving a good thing? If interest rates were set by the market rather than government, do you really think we'd have inflation?

Sure - but if inflation was at 0%, the repo rate was 0% and your deposit rate was 0.25% there is not much incentive there.

Also, the only was that the debt ridden general public are going to get out of the mire in their lifetimes is by a bit of inflation eroding the debt.

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Hi

I'm not so sure you are correct about inflation. I think there will be a temporary period of elevated inflation followed by a recession. Here's why: As an article posted in another thread states, consumers - not just in GB - but also in the U.S. and in other countries in Western Europe - are burried in mortgages, credit card debt etc. The boom in the economy in the past few years have mainly been fueled by the demand caused by consumers borrowing and spending money. Clearly, this is coming to an end and retail sales are already starting to look bad. While the emerging markets may be able to increase their demand it is pretty clear that the overall demand is going to fall, and this should help keep inflation down. The big joker is of course oil prices. For now, many companies have been picking up the tab on increased oil prices but they are starting to pass them on to consumer's. This is what is causing the jump in the CPI. Barring future major increases in oil price, I think the CPI will stop it's increase once the oil price increase has been factored in. Since consumers have a relatively fixed amount they can spent (not being able to borrow their way out of the problems) I don't see where inflation should come from. This would only happen if workers are able to negotiate higher wages, but I think that is unlikely as many companies are facing increased competition from overseas and are doing their best to cutting costs. Outsourcing could be a factor here as well.

It seems some people here are betting on a recession as well as inflation ("stagflation") but historically this is not very common. The only example was in the 70's. This was triggered by increasing oil prices so I guess this could happen again. On the other hand, oil prices are far from their highs in the 70's (if you correct for, yes, inflation) but if oil continues to rise this could happen.

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Oil is not the only inflationary factor.

A lot of costs have been reduced over the last 5 years by outscourcing to the Far East - this leads to a one off productivity gain and cost reduction. The effect of this is that currency moves from the UK to the Far East - the Pound weakens and imports become more expensive.

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Oil is not the only inflationary factor.

A lot of costs have been reduced over the last 5 years by outscourcing to the Far East - this leads to a one off productivity gain and cost reduction. The effect of this is that currency moves from the UK to the Far East - the Pound weakens and imports become more expensive.

Right but this would also serve to reduce demand for overseas goods. Additionally, the outsourcing keeps wages down and raises the domestic unemployment which should make high inflation less likely. So I'm not at all convinced that outsourcing should lead to a net increase in inflation.

It's of course true that the productivity gains could fuel inflation. But how big are these gains in absolute values? Are they big enought that they could fuel inflation? Consumer spending is one of the biggest engines driving the economy and I don't think inflation is likely if it sets out.

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Right but this would also serve to reduce demand for overseas goods. Additionally, the outsourcing keeps wages down and raises the domestic unemployment which should make high inflation less likely. So I'm not at all convinced that outsourcing should lead to a net increase in inflation.

It's of course true that the productivity gains could fuel inflation. But how big are these gains in absolute values? Are they big enought that they could fuel inflation? Consumer spending is one of the biggest engines driving the economy and I don't think inflation is likely if it sets out.

Problem is that the productivity gain is a one off - this reduces cost and inflation only once - after that you are screwed.

I agree that, once everyone has lost their job, it ratehr dampens demand but this will not necessarily lower inflation. As there is nothing made in the UK anymore the demand shock will only slightly reduce the level of imports. As unemployment rises, central government spending will increase leading to a further reduction in the currency value unless there is a rise in interest rates. Rising interest rates lead to short term inflation and on it goes ......

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Problem is that the productivity gain is a one off - this reduces cost and inflation only once - after that you are screwed.

I agree that, once everyone has lost their job, it ratehr dampens demand but this will not necessarily lower inflation. As there is nothing made in the UK anymore the demand shock will only slightly reduce the level of imports. As unemployment rises, central government spending will increase leading to a further reduction in the currency value unless there is a rise in interest rates. Rising interest rates lead to short term inflation and on it goes ......

Another point to consider is that if the pount/euro really starts losing value due to outsourcing sooner or later outsourcing won't pay off because of the currency conversion...

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'Without inflation there would be no incentive for people to invest and increase the productivity of the economy;' .... balderdash in my opinion. Imagine an economy where, for example, it was against the law to raise prices (memories of a prices and incomes policy). Businesses would simply have to invest to improve efficiency if they wanted to increase their margins.

Makes me wonder why we don't impose such policy, seeing as it would be so good for us all. What are the odds that said businesses would simply make their products shoddier, or would instead choose to export them?

Inflation is a scourge. I imagine from your comments you are young and have no experience of living in an economy with high inflation. Some on here mention the erosion of debt - a handy by-product of inflation. What they don't mention is that when prices are rising at say 10% a year, it is very hard to get a 10% pay-rise to cover them and, because of tax, you actually need a 15% pay rise just to stand still.

How is that bad? The employees might not like it but it sure is a lot better than being out of a job because the company cannot compete in the long run. Also, inflation might well provide the only politically acceptable way of defaulting on promises made to the ever growing public sector, at least assuming pension index-linking can be redefined a little. It would obviously be a lot better not to have made said daft promises to start with but it is not terribly helpful to suggest that if one wanted to run a successful economy then it would be best not to start from here.

Some say that the current dificulties experienced by Italy stem from the fact that usual remedies (i.e. inflation & devaluation) are no longer avallable to them. I do not know whether this is true (although it certainly sounds plausible), and neither am I suggesting that either remedy should be needed regularly. However, they too have to start from where they are now.

The reason successive governments since the 70s have been determined to stamp inflation out (or down to manageable levels) is because it is a scourge.

Yes, but not for the reasons you mention.

Also, of course, you soon find your export markets disappear if you keep having to put the price of your goods up every year.

No, the exchange rate goes down to compensate. Obviously, that is less than virtuous for any country that heavily relies on imports.

This is one of the reasons why our manufacturing industry has been decimated.

I am not sure inflation was the direct cause. If it were, you would need to explain why manufacturing jobs are still being lost in what is still basically a benign inflationary environment.

Deflation is a scourge - which is why the BOE have a target of 2% inflation. Nicely manageable. Deflation means people put off buying things in the expectation they will be cheaper tomorrow.

That may be no bad thing. Look where the 'buy now what you just about may be able to afford tomorrow' culture has got us.

I certainly do not think that high inflation would be good. I am not sure I would be fussed about deflation, particularly as it would make it impossible for the government to tax interest at the current penal rates. Either way, I think you might need better arguments to convince others that inflation really is so bad.

Thanks,

MoD

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  • 341 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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