Price inflation should be combatted with low interest rates

[Si1]

Larry Eliot in the Guardian today.

Says price inflation without wage inflation is actually deflationary so we need low interest rates. I don't see how low interest rates will however address this.

 

 

https://www.theguardian.com/business/2017/apr/11/uk-inflation-only-going-up-lets-hope-interest-rates-dont-follow

Edited June 24, 2017 by Si1

[crashmonitor]

I'd like to make a financial contribution to your paywall free article Larry, unfortunately because my savings earn nothing subsidising your mortgage I can't afford to.

Edited June 24, 2017 by crashmonitor

[Gigantic Purple Slug]

As usual shys away from the elephant in the room, which is the reason that workers have reduced bargaining rights is because there is an effectively unlimited pool of labour for employers to draw on.

The productivity article again doesn't mention one of the contributors to lack of productivity in the respect that employers in this country have found it easier to throw bodies at many problems rather than invest in technology. I do buy the banks not investing as a contributor as well though. Everywhere I have looked in UK business I have found that accountants/management want returns on a timescale incompatible with investment in manufacturing hardware. Probably because return timescales in finance are typically much less.

 

[ThoughtCriminal]

Intellectual yet idiot, as taleb would say

[Si1]

27 minutes ago, ThoughtCriminal said:

Intellectual yet idiot, as taleb would say

Very good point

[crouch]

3 hours ago, Si1 said:

Larry Eliot in the Guardian today.

Says price inflation without wage inflation is actually deflationary so we need low interest rates. I don't see how low interest rates will however address this.

 

 

https://www.theguardian.com/business/2017/apr/11/uk-inflation-only-going-up-lets-hope-interest-rates-dont-follow

Low interest rates mean that real discretionary income is higher than it would be with high rates (the mortgage is lower so you have more to spend on the circus). Price inflation without wage inflation reduces real wages and depresses spending which leads to deflation via a reduction in aggregate demand.

[spyguy]

3 hours ago, Si1 said:

Larry Eliot in the Guardian today.

Says price inflation without wage inflation is actually deflationary so we need low interest rates. I don't see how low interest rates will however address this.

 

 

https://www.theguardian.com/business/2017/apr/11/uk-inflation-only-going-up-lets-hope-interest-rates-dont-follow

Price inflation is caused by the pound falling, rising costs of imports.

There does not to seem much in the way of a boost in exports as most brits work in consumption jobs, or just sit on tax credits. Most of our exports are not that price sensitive.

[spyguy]

2 hours ago, ThoughtCriminal said:

Intellectual yet idiot, as taleb would say

Applies to ehole loadof economists. They really should fckoff. All the uks problems can be traced back to economists.

[spyguy]

18 minutes ago, crouch said:

Low interest rates mean that real discretionary income is higher than it would be with high rates (the mortgage is lower so you have more to spend on the circus). Price inflation without wage inflation reduces real wages and depresses spending which leads to deflation via a reduction in aggregate demand.

No. Thats assuming the majority have mortgafes, we dont.

Low ir have pushed up asset prices and rents, causing loss of spending power.

[doomed]

Who cares what these idiots think. The problems couldn't even be fixed if they wanted to.

Destruction and rebuild is the only option left.

[Noallegiance]

21 minutes ago, spyguy said:

Price inflation is caused by the pound falling, rising costs of imports.

Surely QE and 98% of currency in circulation being credit driven is the biggest cause, which is actual inflation.

[olliegog]

how could interest rates go any lower (currently hovering at 0.25% ) and how long since they were dropped as an emergency measure (was it 8 years ago?).  Seems to have become the 'new normal' and just pushed up asset prices  

[Si1]

1 hour ago, crouch said:

Low interest rates mean that real discretionary income is higher than it would be with high rates (the mortgage is lower so you have more to spend on the circus). Price inflation without wage inflation reduces real wages and depresses spending which leads to deflation via a reduction in aggregate demand.

You've rather missed the point. The question is whether higher or lower IRs are the right correction to this.

[spyguy]

1 hour ago, Noallegiance said:

Surely QE and 98% of currency in circulation being credit driven is the biggest cause, which is actual inflation.

No. Qe is going into assets, which lay outside of inflation metrics.

If inflation recorded housing then it would be much higher.

[crouch]

53 minutes ago, Si1 said:

You've rather missed the point. The question is whether higher or lower IRs are the right correction to this.

The context of the article harks back to 2011 when inflation went over 5% but the BOE "looked through" this and said that the inflationary impulse would work its way through the system and inflation would decline quite quickly, which it indeed did.

The situation we have now is very similar. IMV the only way the BOE would or should raise rates is if there is a collapse in the £ or there are second round effects on wages (a wage/price spiral) and indeed I don't think they will raise them, despite all the sabre rattling and 5/3 votes on the MPC. Larry Elliott said this in an article earlier in the week (that the BOE shouldn't raise rates in these circumstances).

The point about putting up rates in the circumstances we have now is that nothing is achieved; the inflationary impulse will wane of its own accord and the only thing an interest rate increase would achieve is to make a bad situation worse - the same argument as in 2011.

 

[Si1]

6 minutes ago, crouch said:

The context of the article harks back to 2011 when inflation went over 5% but the BOE "looked through" this and said that the inflationary impulse would work its way through the system and inflation would decline quite quickly, which it indeed did.

The situation we have now is very similar. IMV the only way the BOE would or should raise rates is if there is a collapse in the £ or there are second round effects on wages (a wage/price spiral) and indeed I don't think they will raise them, despite all the sabre rattling and 5/3 votes on the MPC. Larry Elliott said this in an article earlier in the week (that the BOE shouldn't raise rates in these circumstances).

The point about putting up rates in the circumstances we have now is that nothing is achieved; the inflationary impulse will wane of its own accord and the only thing an interest rate increase would achieve is to make a bad situation worse - the same argument as in 2011.

 

Ok so that's the crux of the debate. WOULD it make a bad situation worse, I'm not sure the price paid for that in terms of risk of under controlling future inflation, is not worse than the short term cost.

[Odin]

2 hours ago, spyguy said:

No. Thats assuming the majority have mortgafes, we dont.

Low ir have pushed up asset prices and rents, causing loss of spending power.

And that spending power loss is now measured in decades, not just a few pinch years with IRs were really high before falling back to "normal" as the phase of the cycle changes.

[longgone]

58 minutes ago, spyguy said:

No. Qe is going into assets, which lay outside of inflation metrics.

If inflation recorded housing then it would be much higher.

if salaries kept with real inflation 75k would be a basic wage. they just keep the monthly payments low while forgetting about the actual debt. 

[crouch]

26 minutes ago, Si1 said:

Ok so that's the crux of the debate. WOULD it make a bad situation worse, I'm not sure the price paid for that in terms of risk of under controlling future inflation, is not worse than the short term cost.

I think so yes; it's a fairly clear case of something being pointless in economic terms. They would only put interest rates up in baby steps, little enough to have a limited effect on inflation but perhaps with a large effect on sentiment (not least in the housing market).

We have too much debt and anything but low rates is going to cause problems now. Folk think that as time goes on and we are further away from the 2008 crisis we are nearer to normalizing rates and the authorities should do this and get us back to where we were. However, debt levels, both public and private are so much higher - and continuing to grow - that in point of fact we are further away from normalizing rates not closer to doing so. We are in a trap and have been for years and things are getting worse not better.

[Si1]

10 minutes ago, crouch said:

I think so yes; it's a fairly clear case of something being pointless in economic terms. They would only put interest rates up in baby steps, little enough to have a limited effect on inflation but perhaps with a large effect on sentiment (not least in the housing market).

We have too much debt and anything but low rates is going to cause problems now. Folk think that as time goes on and we are further away from the 2008 crisis we are nearer to normalizing rates and the authorities should do this and get us back to where we were. However, debt levels, both public and private are so much higher - and continuing to grow - that in point of fact we are further away from normalizing rates not closer to doing so. We are in a trap and have been for years and things are getting worse not better.

How would you say now differs from the 1970s then?

[crouch]

2 minutes ago, Si1 said:

How would you say now differs from the 1970s then?

Much lower levels of debt (both public and private) and much lower levels of unionism. Unions (entrenched in a much larger public sector in particular) were notorious for leap frogging pay deals which would set off a wage/ price spiral so the situation we have now (inflation kicked off by a fall in sterling) would require interest rate increases and fairly swiftly which is more or less what happened. In fact there were incomes policies which tried to control pay directly rather than working indirectly through changes to interest rates.

Ironically we have a much more insecure labour market now combined with much higher debt levels that has created a parlous situation which could not have been imagined 50 years ago. People have the illusion of prosperity but growth has been little more than spending borrowed money, based on buying things we don't need using money we don't have.

[zugzwang]

Whether or not interest rates should rise by a token 25bp or 50bp in 2017 isn't really the issue. Rather, we should be asking Mr Carney why interest rates haven't moved away from zero already, given that he and his esteemed colleagues have spent the past five years telling us that the economy is steadily improving. Perpetual ZIRP is quite inconsistent with the dynamics of an improving economy. Perpetual ZIRP suggests instead that the economy hasn't really recovered at all and that either the Bank's macroeconomic forecasts aren't worth the paper they're printed on, or Mr Carney has been telling untruths.

[billybong]

Continuing with low interest rates just hides the problem and is a symptom of an ever more paralyzed economy.  An economy run by pathetic and self serving people.  Something needs to change and as it's pretty much the only lever then it's got to be interest rates even if the transition period is a pain. 

The economy also needs to be seriously restructured.

Edited June 25, 2017 by billybong

[billybong]

14 hours ago, zugzwang said:

Whether or not interest rates should rise by a token 25bp or 50bp in 2017 isn't really the issue. Rather, we should be asking Mr Carney why interest rates haven't moved away from zero already, given that he and his esteemed colleagues have spent the past five years telling us that the economy is steadily improving. Perpetual ZIRP is quite inconsistent with the dynamics of an improving economy. Perpetual ZIRP suggests instead that the economy hasn't really recovered at all and that either the Bank's macroeconomic forecasts aren't worth the paper they're printed on, or Mr Carney has been telling untruths.

+1