Is the current inflation temporary or persistent.

[Flat Bear]

9 minutes ago, A.steve said:

I didn't vote because none of the options really felt valid.  I am uncertain both about how 'inflation' was intended to be interpreted and similar for 'temporary/permanent' - as well as having uncertainty about what I think will happen with my own interpretation of 'inflation' - i.e. a measure that would be a meaningful personal metric for myself.

All three of the voting options are approximately equally mismatched with what I expect.  I might not even be able to describe what I expect... but here's an approximation.  I believe that 2020 represented a fundamental shift in international relations... that will have huge and prolonged implications both for international trade and for the availability of credit.  I believe the repercussions of decisions made in 2020 will be dramatic and permanent (likely to substantially affect human experience for many decades - perhaps many centuries) and do not believe all the effects are yet observable.  I, personally, do not believe that the reason for the decisions I'm talking about had any clinical basis whatsoever.

I think the political situation in both China and Russia is febrile.  I suspect that, perhaps to a lesser extent right now, many other countries' populations are experiencing a severe cultural shock... the consequences of which will last decades... and may well redefine life on earth for mankind.  I think the official inflation metrics are a farce now - just as they have been a farce since - roughly - 1994.... (I think that "inflation targetting" as monetary policy was no worse than typical for a brief period - which I estimate at 2 years.)  Thereafter, I believe 'financial innovation' has dramatically skewed every meaningful aspect of human experience.  If we assume children are shielded from economic reality by their parents until they are 18... this means no-one under the age of 48 has any credible personal experience of an economic environment in which the money supply was not distorted by a monetary policy of "inflation targeting".  I believe it was wrong-headed then and I believe it is wrong headed now.  The fact that, now, targeting the inflation metric requires increasing interest rates... and I believe interest rates should rise... does not mean I believe that these rises in interest rates should be policy as a consequence of the official statistics for the inflation rate.

I believe that financial engineering unreasonably skewed the relationship between capital expenses and operating expenses... between asset prices and wages... between speculative investments and tangible goods.  I think that the emperor has been recognised as being naked - and some of the elite are panicked.  The problem isn't a problem of calculations - the problem is that everything that's being calculated is utterly irrelevant, and we may-as-well count tea-leaf patterns.

I think rising interest rates (which I have considered absolutely critically important for 20 years) will now have a dramatic effect on economic activity.  I think that a fairly large proportion of the public are going to experience a dramatic and unpleasant shock... and, when they do, they'll realise their reality is the same as it always was - but, in the past, they hadn't recognised it.  I expect a considerable reduction in demand... I expect fewer holidays; fewer exotic gadgets and cars; I expect much lower retail sales.  I expect industrial action with strikes and for a new reality where there is much more conflict.  I expect many to have dramatically less disposable cash - and I expect the cost of essentials to rise... at the same time... the cost of servicing debt will rise... and this will devastate many lives.  At the same time, I expect coveted luxury items (large houses; flash cars; artworks; yachts; aeroplanes; helicopters - etc.) to plummet in price and value.  I expect the value of investment portfolios will fall in nominal terms and... thereafter... a new baseline will be set.

For someone who has income of £50K; a house for which they paid £350K with a £250K mortgage - with 4 mouths and an inefficient heating system to to feed... with £10K in credit card debt and a PCP car....  I expect their personal inflation rate to seem very high for the foreseeable future.

For someone who has income of £50K; a home which they own outright; 2 mouths and an efficient heating system to feed... with £100K in cash savings and no debt... where their spending on essentials used to be <10% of their available income... to perceive a much lower rate of inflation... they may even perceive deflation.

In the context of all that... I know I can't predict the trajectory of CPI figures... and neither can anyone else.  There are too many relevant uncertainties.  Even if I could predict CPI figures - doing so would be pointless... because I don't think CPI measures anything that matters.  CPI is the HCIP metric (as defined by Eurostat - then renamed) that Eurostat made clear was unsuited as a metric for domestic inflation (to guide monetary policy.)

Scotbeard was demonstrating a common misunderstanding of the word "semantic" when attempting to make a point about semantics.  Quite an elegant little self-referential pirouette.

As for Chaucer's proclivities, I doubt there's any foolproof way to test the hypothesis.  In this sense, I suppose, analogously to questions about inflation, where different people have different interpretations of 'inflation', just as different people interpret 'queer' in different ways, it's difficult to be absolutely sure.

Chaucer used words that sounded funny... so, in that sense, perhaps he was just a banker?

Hello Steve

Thanks for the long post. Some interesting thoughts in there.

It is always difficult to think in macro terms as the economy, global in nature as it is now, has so many aspects. You are of course right on this.

It is what each individual component is relevant to or more precisely what overall influence it has on the global economy. Sometimes we need to stand back and look at the big picture.

We have all been underestimating China. What happens in China dwafs everything currently happening in the Ukraine. We need to look at the overall affect each has on the global economy. There are many that really do understand this and like myself are really frightened on what happens next.

The reason for the current inflation is down to the expansion of the money supply that started some 20 years ago and has steadily been building especially over the last few years. Unfortunately this is not an easy thing to remedy, this is an understatement as it is extremely difficult to remedy. The BOE can not raise rates because it can not afford to pay the interest to itself (the banks) if this makes sense. The BOE has to raise rates because they have to to defend a weakening pound and possible extremely high inflation. Can you see the paradox? Because of this situation the UK will see inflation much higher and for a longer period than most other countries. There will be a reset as you seem to allude to and overall the UK will become poorer generally as a consequence.

As is always the case, this will take a long time to play out and it will be a painful experience for all of us.

I can not see how we can avoid inflation, I really can't. As the money we hold becomes less valuable people will demand more of it for the services they provide which becomes a self fullfilling spiral. We are already in this spiral. We have already seen the start of a number of strikes which will get much worse as more and more workers demand more. Those workers that are really needed will be paid more, this is the way supply and demand works. Those that are not really needed will be out of a job.

We will have hard times ahead which I think we both agree on.

[A.steve]

20 minutes ago, Flat Bear said:

The reason for the current inflation is down to the expansion of the money supply that started some 20 years ago and has steadily been building especially over the last few years. Unfortunately this is not an easy thing to remedy, this is an understatement as it is extremely difficult to remedy. The BOE can not raise rates because it can not afford to pay the interest to itself (the banks) if this makes sense. The BOE has to raise rates because they have to to defend a weakening pound and possible extremely high inflation. Can you see the paradox? Because of this situation the UK will see inflation much higher and for a longer period than most other countries. There will be a reset as you seem to allude to and overall the UK will become poorer generally as a consequence.

I'm not sure I do see a paradox, as such... but I think I understand what you are suggesting.  Your ideas seem to align with Monetarist/Chicago-School/Hayek models.  While I recognise those models as being elegant... I don't believe they accurately reflect reality... and I don't think they have a strong hold over the influential minority to make them a self-fulfilling prophecy.

At the risk of returning to replies of derision, I'll have a go at what I believe should be done.  I believe that it has been unethical to seek to centrally control interest rates... I think there's always political pressure to make the rates lower... but, when rates are lower, time itself progresses more slowly. (For pedants: I am using the word "time" here as a measure of meaningful progress - not the number of planetary gyrations or anything like that.)  I believe that slowing time advantages some demographics relative to others - and that accelerating time (increasing rates) will reverse that bias.

I think we agree that the BoE will raise rates because every other central bank will be doing that.  When it comes to the question "will we be poorer" - this definitely depends upon what you think characterises 'poorer'.  A materialist would, almost certainly, agree with you.  Conversely - as I think all our abstract measurement strategies (money; inflation - etc.) are fundamentally flawed... perhaps we won't even know if we're poorer or richer.  In order to define poorer, one needs to decide what deserves to be valued.  I firmly believe that - today - this question is an open one.

Edited August 31, 2022 by A.steve

[zugzwang]

1 hour ago, A.steve said:

In order to define poorer, one needs to decide what deserves to be valued.  I firmly believe that - today - this question is an open one.

On a forum call Housepricecrash?

[zugzwang]

2 hours ago, Flat Bear said:

The reason for the current inflation is down to the expansion of the money supply that started some 20 years ago and has steadily been building especially over the last few years. Unfortunately this is not an easy thing to remedy, this is an understatement as it is extremely difficult to remedy. The BOE can not raise rates because it can not afford to pay the interest to itself (the banks) if this makes sense. The BOE has to raise rates because they have to to defend a weakening pound and possible extremely high inflation. Can you see the paradox?

Zugzwang. There are no good moves.

[winkie]

10 hours ago, markyh said:

True but once it works through in even 12 months YOY you are still looking at prices 100% higher everywhere than 2019. Inflation will fall back but it is not going negative by 10% YOY suddenly.  Didn't in the 70's wont now. 

Different circumstances then, the world was a much different place then, we were not the wealthiest country in Europe nor the poorest......since our inflation is not solely our problem because now even more connected with what happens elsewhere.......it will go up, it will fall back, different places, different speeds.... 

[markyh]

1 hour ago, winkie said:

Different circumstances then, the world was a much different place then, we were not the wealthiest country in Europe nor the poorest......since our inflation is not solely our problem because now even more connected with what happens elsewhere.......it will go up, it will fall back, different places, different speeds.... 

We have strikes for wage inflation, i do see the level of growth inflation falling back, even to 2% again, i dont see it ever going MOM or YOY negative , i.e deflation.  At least not until automation and AI is much more advanced. 

[A.steve]

5 minutes ago, zugzwang said:

On a forum call Housepricecrash?

🙂  I don't think houses define value... I do think that freedom and control are valuable - and recognise that property rights are essential (given our regime) if one wants to exert control over one's own life and prospects.  Land/real-estate is an extremely poor proxy for value because it is not homogenous in the ways that matter - every house is different, just as every piece of land is different.  There are many ways in which one can be poorer - they are all difficult to effectively measure.  I reject the idea that increased prices necessarily make us poorer... because, for every price, there are two parties engaging in the transaction.  Once both parties are considered, the price - on average - is neutral among those parties... that is, if you believe currency provides a valid unit for value... at least.  Poverty arises from misallocation of resources... that bit is obvious... the 'correct' allocation is more difficult to define.

[winkie]

1 hour ago, markyh said:

We have strikes for wage inflation, i do see the level of growth inflation falling back, even to 2% again, i dont see it ever going MOM or YOY negative , i.e deflation.  At least not until automation and AI is much more advanced. 

About right......only problem AI and automation requires energy, lots of it.....it requires growth, manufacturing, and investment, it requires a willingness to take on debt.

[markyh]

17 minutes ago, winkie said:

About right......only problem AI and automation requires energy, lots of it.....it requires growth, manufacturing, and investment, it requires a willingness to take on debt.

If you could replace 5 staff with 1 Teslabot costing £250k working 24/7 , would you invest in one? 

[Zzzzzzzzzzzzzzzzzzzzzzzzzz]

15 hours ago, markyh said:

So like the 1970's wage inflation will have to come along for the ride, and those with fixed assets already (houses, cars etc) will get their fixed debts bailed out by wage inflation again.  

Heaven knows... far more complext than it was in the 70s so hard to call. 

[Flat Bear]

On 31/08/2022 at 18:50, slawek said:

5 years is still a long time. The market expects it to be over in a year. 

Bumped thread. For slawek to vote in the poll. Or anyone else who has not done so.

[Flat Bear]

On 29/08/2022 at 21:31, Flat Bear said:

It will be very interesting coming back to this thread in a years time. What we understand then about what is happening now will be more than a little interesting. How many will have changed their view from temporary to persistent?

Sorry but I have bumped this thread up 2 months early but it would be good to find out who, if anyone, has changed their minds. Temporary to Persistent or visa versa.

[Flat Bear]

On 31/08/2022 at 22:04, Flat Bear said:

 Can you see the paradox? Because of this situation the UK will see inflation much higher and for a longer period than most other countries. There will be a reset as you seem to allude to and overall the UK will become poorer generally as a consequence.

As is always the case, this will take a long time to play out and it will be a painful experience for all of us.

I can not see how we can avoid inflation, I really can't. As the money we hold becomes less valuable people will demand more of it for the services they provide which becomes a self fullfilling spiral.

Think we are starting to see this now.

[scottbeard]

14 minutes ago, Flat Bear said:

Sorry but I have bumped this thread up 2 months early but it would be good to find out who, if anyone, has changed their minds. Temporary to Persistent or visa versa.

I have not changed my mind from Temporary to Persistent.  However, last year I said this:

On 29/08/2022 at 19:26, scottbeard said:

I voted temporary as I believe at least one monthly CPI figure between now and august 2027 will be 3.9% or lower

However, last year I was virtually certain (let's say 95%) that it was temporary by that definition, whereas now I would concede that there is a higher possibility that CPI never falls below 4% in that timescale (lets chance of it being temporary is now 75%, not 95%).

What I actually believe is that there is a far wider range of possible outcomes between now and 2027 than i did last year.  That includes low inflationary ones as well as higher inflationary ones.  Basically the BoE has not managed to get inflation under control, which means they now need to take more drastic action (as I think you predicted) but the result of that drastic action could still end up being an overcompensation and a big deflationary recession.  Last year I thought inflation would pretty much fall back to 5-6% on its own, and all the BoE had to do was get it down from 5-6% to 2%.  Now thought it seems to be getting stuck at more like 7-9%.

[Pmax2020]

I still think it’s temporary because I believe the pandemic masked brexits impact on our economy.

It costs more to import goods, namely food, and the absence of hard-working migrants as push our own manufacturing costs up. 

[fellow]

30 minutes ago, Pmax2020 said:

I still think it’s temporary because I believe the pandemic masked brexits impact on our economy.

It costs more to import goods, namely food, and the absence of hard-working migrants as push our own manufacturing costs up. 

We have an absence of migrants?  Can you tell that to the record immigration figures?

[17clarence]

18 minutes ago, fellow said:

We have an absence of migrants?  Can you tell that to the record immigration figures?

He did say ‘hard working’ migrants.

[Pmax2020]

8 hours ago, 17clarence said:

He did say ‘hard working’ migrants.

Sure did. I’ve done a couple of 2-3 months stints in low skilled/paid roles.

It’s not an exaggeration to say that 95% of polish workers took those jobs very seriously. They worked incredibly hard, always took the option of overtime, and were frankly freakishly diligent and subservient in what was a pretty menial role. 

On the other, probably only 20% of my fellow countrymen were of the same ilk. There was always a ‘this is just a stop-gap vibe’. Most people admired how hard the poles worked.

I appreciate this forum doesn’t like anecdotal stories like this, but the difference in work ethic was so unbelievable and it left a huge level of admiration from many of us. A lot of them were studying here and working full time. Not many young people here are prepared to do that. 

[17clarence]

You are not wrong. All the farm workers slog away.

I’ve a few mates in Poland, they say Poland imports Ukrainians to do a lot of work. 

[Flat Bear]

So it looks like those that believed the BOE then still believe the BOE was correct and there is no real inflationary problem, ie it is all temporary and no need to raise rates as rate rises are a long term tool.

IF inflation was temporary there is no problem.

Even the banks and some of the market seem to believe all this. 5 year fixed mortgage rates are LOWER than 2 year fixed rates? This tells you all you need to know.

Let them continue to be surprised over and over and over again when they underestimate the affect QE and ZIRP had on the currency and economy on a long time scale. There was consequences and the chickens are coming home to roost.

Notice how the debt that has built up since 2011 correlates with the QE pumped into "the system".

QE was deflationary, yes I know, because it made the currency very cheap and the value of it fell so interest rates could be kept artificially low. This is and will slow down the fall in assets such as houses in the shorter term (end of 2023?)

QT is inflationary for the same reason. There is still a lot of money in the system and it will take a long time for this money supply to drop to a level where money actually becomes valuable and banks and other institutions actively ask you for your money in return for a favourable interest rate ie above the inflation rate.

Around a 6% base rate will be where we will see the start on downward pressure on house prices as enough people decide to change their habits. QT will take some time to actually have a real affect.

It seems I have underestimated the timescale of events and was wrong. The economy is still holding up. Plenty of offers of very cheap money albeit more than before, The CPI figures are still lower than I thought and wages are not increasing anywhere near what I had thought by now.

Bubbles go up much higher and last much longer than anyone can predict.

[Flat Bear]

On 29/08/2022 at 21:31, Flat Bear said:

It will be very interesting coming back to this thread in a years time. What we understand then about what is happening now will be more than a little interesting. How many will have changed their view from temporary to persistent?

Well it will be a year in 10 days time. Did anyone change their mind in any direction?

I think it is more likely we have all got even more entrenched in our own views.

Was I wrong? I have underestimated the speed of the economic decline, again. (I seem to underestimate this every time) I have also underestimated the resilience of the UK economy. The biggest of all mistakes was underestimating the resilience of the Chinese economy. If you looked back at the Chinese economy and the collapse in the property sector who would have thought it would still be afloat today.

I still believe this inflation is persistent and we are only at the very beginning of a very long term problem.

Interested to here anyone else's take on the last 12 months.

[A.steve]

On 29/08/2022 at 18:22, Flat Bear said:

Am I the only one that thinks this inflation is persistent and in no way temporary?

I voted "don't know" - but that doesn't imply I have no opinion.  I think:

• Our government (and I suspect governments abroad, too) have been actively pursuing fiscal policies intended to stoke inflation.  I think that, in 2019, there were grave concerns that a massive recession was about to hit - and that it could cause a deflationary spiral.  I think fears of a deflationary depression prompted lawmakers to pursue fiscal policies that would never have been feasible otherwise.  I suspect that many of the factors which made the recession likely in 2019 have been resolved by either fiscal or monetary policy.
• I don't think that increased interest rates combat elevated inflation... I think that other factors are far more influential on inflation.  I think that meaningful interest rates are essential in order that currency itself functions to promote an effective economy.
• Inflation will be persistent if substantial wage increases become common.  If we don't see substantial inflation, I think the UK government has a huge problem:  servicing sovereign debt.  I can envision potential technical strategies - but... if these were adopted, the value of Sterling - relative to other currencies - could be dramatically affected.

I think high inflation is likely over the coming decade - much higher than 2% CPI.  I suspect this will be used to justify ~6% interest rates - though I don't expect rates to exceed inflation.  I think that interest rates between 6% and 8% will be generally beneficial to society... and I think that independent of what happens to inflation.   Inflation is best tackled by fiscal rather than monetary policy.

 

 

[supermarioj]

I think high inflation is here to stay and will be very painful. We will see  recession and could see a depression. With all the extra mouths to feed there are problems that this government doesn't want to address, the next one will have serious problems to face.

[winkie]

Inflation high enough to reduce the value of the currency, the pound.....to compensate for all the money brought into existence from new lending especially secured lending on land and buildings......inflation that is helping erode old public and private debt in existence from over 400bn of QE buying government bonds since 2009, inflation that is bringing in more tax revenue.....inflation that is helping to devalue people's savings over a lifetime of working......when a pound was once worth something, when a pound once took more work and time to earn.

The debt will be spent then inflated away or defaulted on......then will need some more.....if still have confidence in it.

Edited August 20, 2023 by winkie

[scottbeard]

On 29/08/2022 at 19:26, scottbeard said:

I voted temporary as I believe at least one monthly CPI figure between now and august 2027 will be 3.9% or lower

When I posted this I was 90-100% sure it would come true in my own mind

Now I’d say 50-60%

A consistent pattern over recent years seems to be things generally panning out worse than I expected but not as bad as @Flat Bear expected - wisdom of a small crowd, perhaps