Mpc's Mervyn Kings Testimony On Inflation Report

[bubbleturbo]

http://today.reuters.co.uk/news/NewsArticl...umber=0&summit=

It is all becoming a bit Rocky. Who has seen the articles floating around today saying that oil price is expected to go up again to around $70/barrell if we and the US have a cold winter.

UP, UP and Away for Interest Rates. . .

[MarkG]

"The Chancellor is certainly right to draw attention to the need in both public and private sectors for earnings growth not to try and compensate for that part of the pick up in inflation that corresponds to higher energy prices."

Translation: the price of oil has tripled, the price of gas is exploding, but please don't ask for higher wages to pay for it or we'll have to raise interest rates! It's so much better for the workers of the UK to have a lower standard of living and higher living costs instead.

Edited November 24, 2005 by MarkG

[bubbleturbo]

Well, after reading that article in full, it seems they are all really hedging their bets and the MPC are worried.

Interestingly, following on from what someone said on another thread, this forum is really a great place to be for information and economic analysis - there is a lot of stuff in that transcript that has been said on here by clever people months and months ago, and argued against by bulls - one small example:

"I would expect the flows of migrant labour to be responsive to the state of the UK economy... That is a safety valve for pressure on the economy which would automatically unwind if the economy were to weaken."

Edited November 24, 2005 by BubbleTurbo

[boom_and_bust]

Translation: the price of oil has tripled, the price of gas is exploding, but please don't ask for higher wages to pay for it or we'll have to raise interest rates! It's so much better for the workers of the UK to have a lower standard of living and higher living costs instead.

Hi,

My God! The stunning audacity of the man.

"OK, I've messed up the economy, I've caused chaos and hyperinflation in the housing market and virtually destroyed the aspirations of the younger generations and private business, destroying many people's pensions whilst in office but look, can you help me out here .......... blah, blah, blah.,"

And the last few days has seen alot of officialdom talk about a stabalising housing market and inflation. That is your definite sign that inflation is about to rip and the market crash. If you let the housing market spiral into an inflationary frenzy, people will ask more money from employers unless you can subdue them effectively enough. So Gordy's outward policy now will be to subdue the business and individual's capacity to increase pay so YOU can subside property speculaters. Except all these little titibits wouldn't be banded around now unless they felt the game was up. Spin and disinformation is NuLab's speciality, after all.

Hah! Glad I got that off my chest.

Boomer

PS. Webmaster, can you put that yahoo face with 'raising hair' on the smiley icons?

[Biriani]

Translation: the price of oil has tripled, the price of gas is exploding, but please don't ask for higher wages to pay for it or we'll have to raise interest rates! It's so much better for the workers of the UK to have a lower standard of living and higher living costs instead.

I have to stand up for King on this issue.

You CAN'T make everyone better off in response to an oil shock just by increasing their wages. Those wages have to be paid for somehow, and that means rising costs of goods and services, leading to higher inflation.

So if everyone were to demand wage increases to try to maintain their standard of living, they wouldn't find themselves any better off, but inflation would go up.

Much better for people to take the one-off hit to their disposable income, rather than constantly trying to play catch up and requiring the Bank to hike up interest rates.

Criticise all you like about housing costs, but expensive oil and gas are classic supply side shocks, and I'm afraid there is no easy way out of those - they really do hurt.

[padders]

Exactly, if you get a supply side shock in oil the simple fact is we are all poorer and our standard of living has to go down. This either happens without inflation and oil just gets more expensive and everything else the same and people can buy less or it happens with inflation where wages go up, price of oil goes up and everything else goes up. You still end up being able to buy the same amount of stuff with the same real wage as you would without the inflation.

Thats always the problem for a central bank dealing with a supply shock, especially an imported one - people are simply poorer. There is no easy way to tell someone that sorry next month you can't buy as much stuff.

This is also what is happening as our currency depreciates as money moves to the $US etc. Everyone gets a little bit poorer and everyone can buy a little bit less. All simple economics.

[Adam]

What I don't understand is this:

Second round inflation occurs - BoE raises interest rates - Mortgage payments go up - Employees demand more money to pay off their debts = more inflation?

Or are employee wage rise requests prevented by employer debt costs rising also = no money to pay wages = no inflation = bankrupt economy?

Does anyone understand economics enough to tell me how higher interest rates prevent inflation in an economy where higher interest rates mean higher living costs for the sheeple?

Or do both inflation and interest rates rocket together?

Sorry if this is a dumb question , but I don't have "the dummy's guide to economics".

[padders]

What I don't understand is this:

Second round inflation occurs - BoE raises interest rates - Mortgage payments go up - Employees demand more money to pay off their debts = more inflation?

Or are employee wage rise requests prevented by employer debt costs rising also = no money to pay wages = no inflation = bankrupt economy?

Does anyone understand economics enough to tell me how higher interest rates prevent inflation in an economy where higher interest rates mean higher living costs for the sheeple?

Or do both inflation and interest rates rocket together?

Sorry if this is a dumb question , but I don't have "the dummy's guide to economics".

One way of reducing inflation is simply reducing how much money people have. If you had £100 a week to spend and now you have £90 you have less cash. Firms have to lower their prices to sell the same stock. They take lower profits, total profits go down etc. Growth goes down etc. Now clearly people might want wage increases but they won't get them. Companies are already making too much stuff (people can't buy as much) so they are going to sack people not employ new ones. Asking for a pay rise during a recession is a bad idea.

So how does the BOE of England reduce people's money, by raising interest rates. More goes on mortgages etc. This affect is much bigger in the UK than most ecnomies because of the high % of home ownership and mortgage debt.

The other aspect of it is the BOE makes threats. If a central bank is considered credible then the threat of raising interest rates should be enough to stop people making wage demands. There is copious amounts of economics stuff written about credit central banks and how that all works but sort of beyond this quite post This is exactly what both the BOE and Brown are doing at the moment in regard to public sector jobs. The BOE is saying if we see public sector pay raises we will raise the interest rate (which simply negates those pay rises). Brown gets the message so has told public sector pay people not to make pay raises.

[Dames]

One way of reducing inflation is simply reducing how much money people have. If you had £100 a week to spend and now you have £90 you have less cash. Firms have to lower their prices to sell the same stock. They take lower profits, total profits go down etc. Growth goes down etc. Now clearly people might want wage increases but they won't get them. Companies are already making too much stuff (people can't buy as much) so they are going to sack people not employ new ones. Asking for a pay rise during a recession is a bad idea.

Interesting you mention that in the light of the Dixons statement.

Seems they've hit the bottom of their price reduction strategy as their head honcho pretty much said that they wont be doing any mega sales ( money off type I mean ) over xmas, even though their ( UK ) bottom line is going down the tubes. I suppose there's only so low you can go , a bad sign for Dixons in my - not very expert - opinion.

Dames

[padders]

I am not so sure Dixons problems are an aggregate economics issue but that they are a crap company and people buy their consumer electronics online or in supermarkets.

As far as I can tell there is no decrease in the amount of consumer electronics being purchased, people just don't buy as much at Dixons anymore. I don't even bother to browse in the shop like I used to. That and one of their biggest profit makers, extended warranties, have been criticised by numerous consumer watchdogs which I am sure decreases the uptake.

If you want to see aggregate economics falls look at luxury industries. Things like the travel sector, cinemas theatres and football season pases, pubs bars and restaurants, hair dressers and as you mention consumer electronics. All the non essentials. These are the things people stop buying when they run out of cash but looking at once company dosen't really work. At the moment I don't see any serious falls in these industries - people keep paying for them with more and more debt. Has to end sometime though.

[FreeTrader]

Does anyone understand economics enough to tell me how higher interest rates prevent inflation in an economy where higher interest rates mean higher living costs for the sheeple?

Initially, interest rates don't so much rise to *prevent* inflation, they rise to *compensate* for it. Investors demand a real return for their savings - an amount above the rate of inflation. If inflation starts to rise, then so will interest rates. Despite Mervyn King's statements, this is something that is beyond the control of the MPC. The BoE can set short term interest rates, but long term interest rates are determined by the market, and this is what really counts.

Inflation is a monetary phenomenon. In response to the energy supply side shock we're experiencing now, the public can either be told to grin and bear it with a lower standard of living, or the money can be 'printed' to ease the pain (as a short term fix). In the 1970's they baulked at the potential backlash from high energy costs and printed the money. We all know the result.

These days, in an era of globalised financial markets, any country which tries to print its way out of a crisis will find its currency brutally hammered by the FX traders, unless other countries follow a similar path (in which case commodities, particularly gold, will take off).

Ultimately however, higher interest rates will take their toll on a highly indebted economy. Rising rates cause an increasing number of business failures and personal bankruptcies, leading to unemployment and a lowering of business activity which takes the heat out of the economy. Also, under such circumstances money is effectively 'destroyed', as non-performing loans are written off. As I said, inflation is a monetary issue, so the destruction of money leads to a deflationary spiral which is extremely difficult to stop once it becomes endemic (as in the 1930's, although the incoming Fed chairman Ben Bernanke believes he has the tools to prevent this happening on his watch).

In short, the BoE likes to give the impression that it's managing monetary policy, but the reality is that global events and markets are dictating current developments. Gordon Brown and the MPC sowed the seeds of our current predicament, and the only real choice available is whether we have a slump now, or we go for a final inflationary burst of activity and have an even greater slump later.

All discussed on HPC over the past twelve months, all so depressingly predictable.

[Guest muttley]

Interesting you mention that in the light of the Dixons statement.

Seems they've hit the bottom of their price reduction strategy as their head honcho pretty much said that they wont be doing any mega sales ( money off type I mean ) over xmas,

I read this and took it to mean that they don't want the general public to wait to the last minute to buy their electricals.Xmas sales are crucial to retail stores like Dixons.

If sales are bad enough then there WILL be price reductions before December 25th!!

[padders]

The other thing that is important between interest rates and inflation is the difference between the real interest rate and the nominal one.

If you are saving, it makes no difference if inflation is 0% and i.r are 10% than inflaton is 10% and i.r is 20%.

However, if you want to get a mortgage it makes a big difference. This is because the monthly payments on mortgages are fixed, ie they don't rise with inflation. When you pay back the last month, 25 years hence you are paying a *lot* less than what you pay on your first month (because your wages should have gone up but the payments havn't).

However, if you add a nominal 10% extra that makes the first month payment (which is the hardest) a lot lot harder. Without inflation increasing mortgage payments, which AFAIK istn't offered by anyone) getting an affordable mortgage is not possible.

[Dames]

Padders , while I dont even begin to be able to understand economics , that wasnt really my point.

It was that companies can only cut costs or lower prices so far and DSG seem to have hit that point. I was just using it as an example nothing more.

Dames

[padders]

Padders , while I dont even begin to be able to understand economics , that wasnt really my point.

It was that companies can only cut costs or lower prices so far and DSG seem to have hit that point. I was just using it as an example nothing more.

Dames

I see what you mean I think its probably just posturing though, ie they want people to buy now before they actually do cut prices just before Christmas

[Dames]

I see what you mean I think its probably just posturing though, ie they want people to buy now before they actually do cut prices just before Christmas

Probably right.

[oracle]

What I don't understand is this:

Second round inflation occurs - BoE raises interest rates - Mortgage payments go up - Employees demand more money to pay off their debts = more inflation?

Or are employee wage rise requests prevented by employer debt costs rising also = no money to pay wages = no inflation = bankrupt economy?

Does anyone understand economics enough to tell me how higher interest rates prevent inflation in an economy where higher interest rates mean higher living costs for the sheeple?

Or do both inflation and interest rates rocket together?

Sorry if this is a dumb question , but I don't have "the dummy's guide to economics".

we don't need higher IR's if there is a big enough THREAT to people's job security to stop them asking for anything above CPI wage rises.The public sector needs to learn this and FAST,because the private sector will not pay for their privileges much longer.

[BandWagon]

I read this and took it to mean that they don't want the general public to wait to the last minute to buy their electricals.Xmas sales are crucial to retail stores like Dixons.

If sales are bad enough then there WILL be price reductions before December 25th!!

The electronic goods sold by the likes of Dixons are just an opportunity to sell insurance.

It's a lousy marketing strategy.

Edited November 24, 2005 by BandWagon

[padders]

The electronic goods sold by the likes of Dixons are just an opportunity to sell insurance.

It's a lousy marketing strategy.

Well, that and the perphierals. They make more money on the compact flash card for the digital camera than they do for the digital camera.

[ajh]

If you want to see aggregate economics falls look at luxury industries. Things like the travel sector, cinemas theatres and football season pases, pubs bars and restaurants, hair dressers and as you mention consumer electronics. All the non essentials. These are the things people stop buying when they run out of cash but looking at once company dosen't really work. At the moment I don't see any serious falls in these industries - people keep paying for them with more and more debt. Has to end sometime though.

I disagree.

Historically little luxuries do very well in downturns, especially those which take people's minds off their problems even for a short time.

[GCS15]

Sexy underwear and the like Can't afford decent "fun" .... apparently

[theChuz]

we don't need higher IR's if there is a big enough THREAT to people's job security to stop them asking for anything above CPI wage rises.The public sector needs to learn this and FAST,because the private sector will not pay for their privileges much longer.

Our union at work (which im not apart of) recently went to the management and said we wanted a 8% rise, which everyone on the shop floor took as meaning we would get an 8% payrise - i laughed at them, i laughed at everyone who mentioed it to me, i laughed so hard it made my day go faster just thinking about it.

Of course everyone just thought i was being negative - they would not listen nor comprehend my justification for why i think they are all a bunch of tosspots.

Needless to say , the directors soon came back with a swift NO, take RPI at 2.8% now or sign up for a 3 year deal of RPI +Undisclosed percentage. So far the 3 year deal has been rejected out of hand by the union (muppetts). We will end up with 2.8% and if its not sorted by jan 1st then there will be no back pay.

Its all quite funny really, ill happily take the 2.8% doesnt really bother me really, but it will bother the people who has just gone to smoking roll-ups because they cant afford 'real' smokes, or those who want an advance on their pay this month, or those who only have £20 to last them 2 weeks, or those who get physically angry when there is no overtime.

Interesting times.

[Michael]

The other thing that is important between interest rates and inflation is the difference between the real interest rate and the nominal one.

If you are saving, it makes no difference if inflation is 0% and i.r are 10% than inflaton is 10% and i.r is 20%.

However, if you want to get a mortgage it makes a big difference. This is because the monthly payments on mortgages are fixed, ie they don't rise with inflation. When you pay back the last month, 25 years hence you are paying a *lot* less than what you pay on your first month (because your wages should have gone up but the payments havn't).

However, if you add a nominal 10% extra that makes the first month payment (which is the hardest) a lot lot harder. Without inflation increasing mortgage payments, which AFAIK istn't offered by anyone) getting an affordable mortgage is not possible.

i seem to remember inflation reaching 25% pa in the Spring of 1975 but Irs never got above 15%!

[brainclamp]

Well, after reading that article in full, it seems they are all really hedging their bets and the MPC are worried.

Interestingly, following on from what someone said on another thread, this forum is really a great place to be for information and economic analysis - there is a lot of stuff in that transcript that has been said on here by clever people months and months ago, and argued against by bulls - one small example:

Bulls like myself have consistantly pointed out that migration is by design, not by accident - the main reason why you have little pricing power for your labour/skills.

It cannot thus be 'un-wound' and will not 'go away' if the situation changes. Thats got to be the biggest delusion of all!

You can't afford a home and yet won't fight for higher pay? Why ?

Our union at work (which im not apart of) recently went to the management and said we wanted a 8% rise, which everyone on the shop floor took as meaning we would get an 8% payrise - i laughed at them, i laughed at everyone who mentioed it to me, i laughed so hard it made my day go faster just thinking about it.

Of course everyone just thought i was being negative - they would not listen nor comprehend my justification for why i think they are all a bunch of tosspots.

Needless to say , the directors soon came back with a swift NO, take RPI at 2.8% now or sign up for a 3 year deal of RPI +Undisclosed percentage. So far the 3 year deal has been rejected out of hand by the union (muppetts). We will end up with 2.8% and if its not sorted by jan 1st then there will be no back pay.

Its all quite funny really, ill happily take the 2.8% doesnt really bother me really, but it will bother the people who has just gone to smoking roll-ups because they cant afford 'real' smokes, or those who want an advance on their pay this month, or those who only have £20 to last them 2 weeks, or those who get physically angry when there is no overtime.

Interesting times.

Edited November 26, 2005 by brainclamp

[theChuz]

I never thought you were a bull brainclamp, just thought you were on a immigration angle.