It’s much too early to feel triumphalist about the defeat of inflation

[Up the spout]

Andrew Bailey and chums at the BofE’s MPC seem to have become newly disagreeable, at least with one another. At the September policy meeting the vote was 5-4 in favour of leaving interest rates unchanged, the sort of knife-edge decision that in recent years has been conspicuously absent. Disagreement, however, is a good thing: economics is highly uncertain and too much unanimity on the committee smacks of complacency.

At first investors appeared content to ignore the committee’s “split” — four members voted in favour of a further rate increase — preferring instead to focus on Bailey’s comments to the Treasury committee last month, notably his hope that inflation would “fall quite markedly” through the remainder of the year. Investors priced out further rate increases and, as such, sterling softened against the US dollar. 

Compared with the Bank, the Federal Reserve was offering a more sober assessment of the monetary policy outlook: US policy rates might be close to, or even at, the peak but they were now likely to be “higher for longer”. That messaging, in turn, contributed to a further sell-off in the world’s bond markets. At the end of last week, the benchmark US ten-year Treasury yield had risen above 4.5 per cent, up from a mere 0.5 per cent at the height of the pandemic in mid-2020 and the highest rate since 2007, which was before the onset of the global financial crisis.

Yet it was not just the Fed’s hawkish messaging that made investors nervous. Oil prices have been rising rapidly since the summer, from $75 per barrel to a rather more inflationary $95. For the UK there is an extra ingredient; it is unnerving (for central bankers at least) to read that wages in the private sector are rising at an annual rate of more than 8%. Given that there is little by way of productivity growth, the only sensible conclusion is that earlier inflationary shocks have caused so-called “second-round effects”.

In the late 1980s UK policymakers faced similar dilemmas. Oil prices had tumbled, policy rates were falling and Nigel Lawson was regarded as an all-conquering hero. Yet those working with Lawson at the Treasury were puzzled. Inflation was unexpectedly low (threatening to drop below 3 per cent) but wage growth was stickily high (refusing to edge much below 8 per cent). The two could not coexist indefinitely. Some thought wage growth would moderate but others, correctly as it turned out, feared that inflation would eventually re-accelerate.

For all the triumphalist headlines in recent days suggesting that inflation has been dealt a mortal blow, it is worth stepping back a bit. Bond markets are cottoning on to the idea that, even if inflation does come down, interest rates may have to stay higher simply to keep it there. Oil markets are moving in the wrong direction, suggesting commodity-led progress on inflation earlier in the year may go into reverse. As far as the UK is concerned, underlying inflationary pressures are still remarkably high. Inflation took a long time to reappear but now that it is here its removal is likely to prove fiendishly difficult.

https://www.thetimes.co.uk/article/its-much-too-early-to-feel-triumphalist-about-the-defeat-of-inflation-tlbrhdrtp

[Will!]

This month’s CPI figures will determine the increase in CPI-linked pensions and benefits in April. Pensions and benefits are increasing economic demand but not supply.  That is inflationary.

I think Hunt is close to a pensions/benefits-price spiral.  HM Treasury and the Bank of England believe that’s not possible because people would rather work than retire or claim benefits.  We shall see.

[msi]

I've said before, whilst the initial inflationary shock were short term items - Ukraine, USD, and commodities, the wider economy had already built this into future budgets and forecasts.

Successful businesses run on minimum 5 year time frames so any inflation shock is immediately carried out and amplified. Ironically inflation drops take much longer to filter through as everyone tries to keep margins - one reason why short term, fly-by-night, business appear to grow during low IRs as they take all the advantages but have nothing to tied them over when TSHTF.

[winkie]

Inflation will come down without this government doing anything......prices will not come down and they have no plans in reducing taxes.......so spend less, pay less tax and help to reduce inflation......sorted. 

[Gigantic Purple Slug]

Don't think the UK government have ever been that interested in fighting inflation.

They have kept rates low, despite it being high. They have been forced to raise them when the Fed raises because of the dangers that an increasing spread between US and UK rates present.

That's why last month they didn't raise - it was an opportunity for them to hold off without widening the spread and they took it.

Then of course next time when they are forced to by the Fed they will claim the political capital.

I do think though they are tiptoe-ing through it at the moment in a fairly clever way. Despite all the rises, we are still not negative on GDP, although people are complaining about mortgage rates there is not a massive crisis. I think this has something to do with the way mortgages are fixed nowadays. Because not everyone comes off the fix all at once, there is less opportunity for political momentum to build by angry mortgage holders.

[MARTINX9]

5 hours ago, Will! said:

This month’s CPI figures will determine the increase in CPI-linked pensions and benefits in April. Pensions and benefits are increasing economic demand but not supply.  That is inflationary.

I think Hunt is close to a pensions/benefits-price spiral.  HM Treasury and the Bank of England believe that’s not possible because people would rather work than retire or claim benefits.  We shall see.

It also determines the extra billions - or not - they need to hand over to local authorities as CPI is also used to uprate their funding (assuming its not passed onto business ratepayers).

Its the most important inflation figure of the year in many respects.

[Dreamcasting]

25 minutes ago, Gigantic Purple Slug said:

Don't think the UK government have ever been that interested in fighting inflation.

They have kept rates low, despite it being high. They have been forced to raise them when the Fed raises because of the dangers that an increasing spread between US and UK rates present.

That's why last month they didn't raise - it was an opportunity for them to hold off without widening the spread and they took it.

Then of course next time when they are forced to by the Fed they will claim the political capital.

I do think though they are tiptoe-ing through it at the moment in a fairly clever way. Despite all the rises, we are still not negative on GDP, although people are complaining about mortgage rates there is not a massive crisis. I think this has something to do with the way mortgages are fixed nowadays. Because not everyone comes off the fix all at once, there is less opportunity for political momentum to build by angry mortgage holders.

The problem is those rate rises are - so far - not good enough. UK base rates need to be at least 1% higher than the US. I reckon unless the BoE start to get back on track with those rate increases soon, we'll be looking at USD parity or below inside a few months. Same goes for EUR, another basket case currency which had previously already tested below parity with the USD about a year ago.

Inflation is going to get real ugly soon in both the UK and EU.

 

[Gigantic Purple Slug]

2 minutes ago, Dreamcasting said:

The problem is those rate rises are - so far - not good enough. UK base rates need to be at least 1% higher than the US. I reckon unless the BoE start to get back on track with those rate increases soon, we'll be looking at USD parity or below inside a few months. Same goes for EUR, another basket case currency which had previously already tested below parity with the USD about a year ago.

Inflation is going to get real ugly soon in both the UK and EU.

 

I don't see UK rates going 1% higher than US any time soon.

Therefore in a few months by your prediction we should see parity or less for USD vs. GBP.

I'm saying that won't happen even if we are 1% behind. Let's see how it pans out by Xmas.

[Stewy]

Wholesale gas/elec markets have cratered again today. November deliveries are down over 6%. This will be baking in deflation in the not too distant future. 

[Dreamcasting]

4 hours ago, Stewy said:

Wholesale gas/elec markets have cratered again today. November deliveries are down over 6%. This will be baking in deflation in the not too distant future. 

The only thing nailed on to deflate is the value of the currency.

Edited October 2, 2023 by Dreamcasting

[Flat Bear]

It seems nearly all the posters on this site believe inflation has been beaten and was just a temporary blip. What makes people think this? Please just don't follow the consensus as confirmation bias is rife especially at the BOE.

We are only just entering an extremely inflationary period of history for this country, possibly higher than has ever been seen before. Look past the short term hopium of the BOE and see the bigger picture.

[scottbeard]

13 minutes ago, Flat Bear said:

It seems nearly all the posters on this site believe inflation has been beaten and was just a temporary blip. What makes people think this? Please just don't follow the consensus as confirmation bias is rife especially at the BOE.

We are only just entering an extremely inflationary period of history for this country, possibly higher than has ever been seen before. Look past the short term hopium of the BOE and see the bigger picture.

I think the 10%+ inflation was a blip caused by the Ukraine war

I think inflation won't get there again because of higher rates and QT ie money is being destroyed not printed now and borrowing is lower

However I'm not sure I'd call it inflation beaten, but rather inflation and interest rates both lilely to Bob around the 4-6% range for many years

 

[Flat Bear]

3 hours ago, Gigantic Purple Slug said:

I don't see UK rates going 1% higher than US any time soon.

Therefore in a few months by your prediction we should see parity or less for USD vs. GBP.

I'm saying that won't happen even if we are 1% behind. Let's see how it pans out by Xmas.

Hmmm

Why do you think the UK is so strong and the pound will be such a strong currency? Why? There is no God given right for the pound to be stronger the the greenback. The BOE can not control the market, that is a fact.

Everything I can see shows a currency under a lot of pressure that along with the Euro will be fighting for it's existance.

UK debt can not be sustained at higher interest rates but higher interest rates are needed to prevent a collapse of the pound.

Bailey and the BOE failed to raise rates at their last meeting and with the pound at 1.21 must think this is a good result. No Mr Bailey you are wrong and the market will punish you in its own time. You will not be able to sell your government debt and you will not be able to re-visit the MMT as you will be staring into the abys of hyperinflation.

Sorry @Gigantic Purple Slug but we are in a much worse place than you could imagine.

[Flat Bear]

6 minutes ago, scottbeard said:

I think the 10%+ inflation was a blip caused by the Ukraine war

I think inflation won't get there again because of higher rates and QT ie money is being destroyed not printed now and borrowing is lower

However I'm not sure I'd call it inflation beaten, but rather inflation and interest rates both lilely to Bob around the 4-6% range for many years

 

Yes, as I said this is what the majority of posters and the BOE think. But there is no reason for this to be the case.

It goes back to fundamentals, inflation is down to the growth in the money supply. At some point you have to stop using excuses for inflation, the economy etc. Ukraine, Covid, Too wet, Too hot etc etc etc. Things happen all the time and you have to take a step back and get rid of all that white noise.

[scottbeard]

1 minute ago, Flat Bear said:

Yes, as I said this is what the majority of posters and the BOE think. But there is no reason for this to be the case.

It goes back to fundamentals, inflation is down to the growth in the money supply. At some point you have to stop using excuses for inflation, the economy etc. Ukraine, Covid, Too wet, Too hot etc etc etc. Things happen all the time and you have to take a step back and get rid of all that white noise.

I just said that : in 2021 we had QE now we have QT

That is a change

In 2021 we had 0.1% rates .  Now we have normal rates

That is a change

In 2022 the ukraine war started and this caused a shock to supply chains and energy markets.   Now the world is adjusting to that

That is a change

I don't understand the argument that inflation can't fall because there is no reason for it to.  There are changes.

[Dreamcasting]

1 hour ago, Flat Bear said:

Hmmm

Why do you think the UK is so strong and the pound will be such a strong currency? Why? There is no God given right for the pound to be stronger the the greenback. The BOE can not control the market, that is a fact.

Everything I can see shows a currency under a lot of pressure that along with the Euro will be fighting for it's existance.

UK debt can not be sustained at higher interest rates but higher interest rates are needed to prevent a collapse of the pound.

Bailey and the BOE failed to raise rates at their last meeting and with the pound at 1.21 must think this is a good result. No Mr Bailey you are wrong and the market will punish you in its own time. You will not be able to sell your government debt and you will not be able to re-visit the MMT as you will be staring into the abys of hyperinflation.

Sorry @Gigantic Purple Slug but we are in a much worse place than you could imagine.

Bailey and gang have reluctantly and half-heartedly raised rates because of the fed. Unfortunately, it's not good enough as the markets were expecting UK base rates to be higher than the US. Indeed, they need to be higher against a reserve currency. The job hasn't been completed because it never really started. The government and BOE are not really interested in effectively controlling inflation for various reasons. The BOE have, and are continuing to sacrifice the GBP.

I've said for some time now that house prices are going to be the least of people's concerns and I still maintain that. House prices may drop 30%, but when the currency can drop much further, it kind of puts things into context. From accomodation, to energy, to food, to employment and beyond; it all comes down to the value of your currency, and without that solid foundation, you ultimately have nothing.

I'm of the opinion that every normal citizen is going to take an unimaginable hit to their level of wealth, and in a lot of cases it will be wiped out completely. That's what happens when you have a basket case currency. The Euro is in an even finer mess. The UK and Europe are in real trouble.

[hughjass]

Why arent the US in trouble ? Their in hoc as well as UK and the Eurozone , theyve suffered much higher rises in food prices, with Joe at the wheel I wouldnt have much faith in that country.

Its only the Saudis who seem to have anything positive on the table.

[hughjass]

Dreamcasting and Flatbear are right Doom and gloom merchants. We arent going to become Venezuela light, i cant see too much good news for the man in the street but it could be worse.

 

[Fishfinger]

4 hours ago, Stewy said:

Wholesale gas/elec markets have cratered again today. November deliveries are down over 6%. This will be baking in deflation in the not too distant future. 

WTI oil😁

 

[Flat Bear]

1 hour ago, scottbeard said:

I just said that : in 2021 we had QE now we have QT

That is a change

In 2021 we had 0.1% rates .  Now we have normal rates

That is a change

In 2022 the ukraine war started and this caused a shock to supply chains and energy markets.   Now the world is adjusting to that

That is a change

I don't understand the argument that inflation can't fall because there is no reason for it to.  There are changes.

I do know what you are saying and yes there are changes all the time. I do not know for sure if I am right in this but I would suggest that we will not see QT being able to start in any meaningful amount as the BOE have put themselves in an impossible position by overdoing the QE. QT could see the economy collapse as nobody wants the UK debt propt up by this newly created source of liquidity. I do not know what the answer could be for the BOE as they are forced to put interest rates up so high. A base rate of 10% could well be much to low to satisfy the market and protect the pound. Our economy is not as robust as many others and a base rate closer to 20% than 10% could well collapse the fragile economy. Money used to be the most expensive comodity of all and it again may become valuable again. We can not be too arrogant as a nation to believe it will be different for us as our economy is special as the markets do not have sentiment.

A major external factor, the biggest external factor, is China. So I would agree the collapse in China will have a really big impact on our inflation going forward. I would suggest that the Ukraine conflict has very little overall affect on UK inflation. The Ukraine conflict as well as OPEC decisions have put prices of certain comodities up generally short term but is used as a convienient excuse for inflation by the BOE.

[Flat Bear]

24 minutes ago, Dreamcasting said:

Bailey and gang have reluctantly and half-heartedly raised rates because of the fed. Unfortunately, it's not good enough as the markets were expecting UK base rates to be higher than the US. Indeed, they need to be higher against a reserve currency. The job hasn't been completed because it never really started. The government and BOE are not really interested in effectively controlling inflation for various reasons. The BOE have, and are continuing to sacrifice the GBP.

I've said for some time now that house prices are going to be the least of people's concerns and I still maintain that. House prices may drop 30%, but when the currency can drop much further, it kind of puts things into context. From accomodation, to energy, to food, to employment and beyond; it all comes down to the value of your currency, and without that solid foundation, you ultimately have nothing.

I'm of the opinion that every normal citizen is going to take an unimaginable hit to their level of wealth, and in a lot of cases it will be wiped out completely. That's what happens when you have a basket case currency. The Euro is in an even finer mess. The UK and Europe are in real trouble.

Agree with you intirely.

[hughjass]

So Dreamcasting , therell be tumbleweed blowing down Downing Street , folks huddled round braziers similar to Berlin 1945?

[Fishfinger]

29 minutes ago, Dreamcasting said:

I'm of the opinion that every normal citizen is going to take an unimaginable hit to their level of wealth, and in a lot of cases it will be wiped out completely. That's what happens when you have a basket case currency. The Euro is in an even finer mess. The UK and Europe are in real trouble.

Not me, saw this coming - all in gold😉

[Flat Bear]

7 minutes ago, hughjass said:

Dreamcasting and Flatbear are right Doom and gloom merchants. We arent going to become Venezuela light, i cant see too much good news for the man in the street but it could be worse.

 

but it could be worse.

I suppose it could always be worse. How could you see it being worse?

Do you think that Venezuela could become UK light? They do have a lot of oil so at least they have this to rely on.

[Dreamcasting]

8 minutes ago, Fishfinger said:

Not me, saw this coming - all in gold😉

I wish that was the answer, but sadly it isn't. Gold is heavily manipulated for one. You might do better outside the UK with your gold, well outside the west at least. Staying in the UK with gold won't help one bit as there won't be an economy to participate in.