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Inflation And Interest Rates

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Inflation and interest rates :Is there a link between the two ?

Yep, the higher real rates are, the less the economy expands (As people save, because its more attactive, and they are reluctant to put on more debt), the lower they are the more it expands.

Real rates are nominal rates (IE 4.5%) less inflation (1.8% CPI), so giving the UK real rates of 2.7%, this compare the the Euroland and US and Japan where they have or nearly have negative rates.

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Real rates are nominal rates (IE 4.5%) less inflation (1.8% CPI), so giving the UK real rates of 2.7%, this compare the the Euroland and US and Japan where they have or nearly have negative rates.

Except CPI is under-reported by several percent, so we have negative rates too. That's why house prices are so high.

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Except CPI is under-reported by several percent, so we have negative rates too. That's why house prices are so high.

Well its good then that the US and Japan and Euroland use the CPI (Which is why its used) so they would have even higher negative interest rates. OR isn't oil etc going up in price there?

Anyway even if we used the RPI we would still have real Positive interest rates.

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Yep, the higher real rates are, the less the economy expands (As people save, because its more attactive, and they are reluctant to put on more debt), the lower they are the more it expands.

That's just a lie, or flat wrong.

Explain Japan having near 0% IR (lowest possible) and their general economic deflation (economy shrinking) over the ninties.

Well go on...

See your just flat wrong.

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Anyway even if we used the RPI we would still have real Positive interest rates.

So you're claiming that inflation is high in Europe, America and, well, just about everywhere really, but magically it's not high here in the UK? Even when the cost of essential items are increasing by double-digit percentages?

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That's just a lie, or flat wrong.

Explain Japan having near 0% IR (lowest possible) and their general economic deflation (economy shrinking) over the ninties.

Well go on...

See your just flat wrong.

I would appreciate thinking before you say that what I write is a lie, I am mistaken sometimes, but I don't lie.

Anyway Japan Why? Because they ended up with deflation, therefore dispite interest rates being nearly 0, inflation was negative so they had real interest rates.

Its basic economics, real reductions in interest rates encourage people to spend, and real falls encourage them to save

Here are the world Real interest rates

	  G7	  UK	  US	  J	   G 	   Fr	   It	  Can2001	 1.1	3.1	 0.6	0.9	2.4	 2.5	 1.9	1.32002	 0.7	2.3	 0.1	1.0	2.0	 1.4	 0.7	0.32003	-0.5	0.7	-1.2	0.3	1.3	 0.2	-0.5	0.12004	-0.6	1.6	-1.3	0.1	0.3	-0.2	-0.2	0.42005	 0.1	1.6	-1.3	0.1	0.3	-0.2	-0.2	0.4

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Yep, the higher real rates are, the less the economy expands (As people save, because its more attactive, and they are reluctant to put on more debt), the lower they are the more it expands.

Real rates are nominal rates (IE 4.5%) less inflation (1.8% CPI), so giving the UK real rates of 2.7%, this compare the the Euroland and US and Japan where they have or nearly have negative rates.

I think there's a relationship between lower IRs (real) and economic growth, but don't think it's such a linear relationship as you have explained. It largely depends upon where the money is going and how the inflation is reported. If a big chunk of money is going towards buying houses and HPI is not reported in the inflation then it screws up the formula.

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So you're claiming that inflation is high in Europe, America and, well, just about everywhere really, but magically it's not high here in the UK? Even when the cost of essential items are increasing by double-digit percentages?

No I'm not, Japan is LOW but they Have LOWER interest rates, Euro is about the same as us But they have LOWER interest rates....Etc.

Give you something to think about US Drive gas gusslers and use lots of energy , UK Compacts and uses less energy, and Japan drives even smaller cars and uses even less.

I think there's a relationship between lower IRs (real) and economic growth, but don't think it's such a linear relationship as you have explained. It largely depends upon where the money is going and how the inflation is reported. If a big chunk of money is going towards buying houses and HPI is not reported in the inflation then it screws up the formula.

I agree the realtionship isn't linear, I never said it was.

No it doesn't screw the formula up, its the cost of living to compare accross countries, Its suppose to exclude housing, although you could say the cost of housing is based on rents, and they haven't moved?

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Yep, the higher real rates are, the less the economy expands (As people save, because its more attactive, and they are reluctant to put on more debt), the lower they are the more it expands.

So what happens to peoples savings? Do they sit in aspic in the vaults of the bank, or does the bank allocate that money to other investments thereby expanding the economy base of the country? Just because it doesnt go over the bar does mean that the economy wont expand, in fact I would argue savings expand the economy faster than money spent on consumption.

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I would appreciate thinking before you say that what I write is a lie, I am mistaken sometimes, but I don't lie.

Anyway Japan Why? Because they ended up with deflation, therefore dispite interest rates being nearly 0, inflation was negative so they had real interest rates.

Its basic economics, real reductions in interest rates encourage people to spend, and real falls encourage them to save

Here are the world Real interest rates

	  G7	  UK	  US	  J	   G 	   Fr	   It	  Can2001	 1.1	3.1	 0.6	0.9	2.4	 2.5	 1.9	1.32002	 0.7	2.3	 0.1	1.0	2.0	 1.4	 0.7	0.32003	-0.5	0.7	-1.2	0.3	1.3	 0.2	-0.5	0.12004	-0.6	1.6	-1.3	0.1	0.3	-0.2	-0.2	0.42005	 0.1	1.6	-1.3	0.1	0.3	-0.2	-0.2	0.4

Getting closer...

Real reductions in interest rates encourage people to borrow, not spend, subtle but important difference.

Real falls do encourage them to save, or repay faster if they can.

There is a floor to how low banks can set rates and that is 0%.

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No I'm not, Japan is LOW but they Have LOWER interest rates, Euro is about the same as us But they have LOWER interest rates....Etc.

Give you something to think about US Drive gas gusslers and use lots of energy , UK Compacts and uses less energy, and Japan drives even smaller cars and uses even less.

I agree the realtionship isn't linear, I never said it was.

No it doesn't screw the formula up, its the cost of living to compare accross countries, Its suppose to exclude housing, although you could say the cost of housing is based on rents, and they haven't moved?

Okay I think this has been discussed manytimes over here, but i repeat it. Doesn't cost of living go up when mortgage repayments go up. Okay due to lower IRs mortgage repayments go down for those who baught earlier but goes up for those who buy later at inflated prices. So if mortgage repayments are not taken into account how a true picture can be represented.

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Okay I think this has been discussed manytimes over here, but i repeat it. Doesn't cost of living go up when mortgage repayments go up. Okay due to lower IRs mortgage repayments go down for those who baught earlier but goes up for those who buy later at inflated prices. So if mortgage repayments are not taken into account how a true picture can be represented.

Correct , but you are forgetting that hamster cages are getting cheaper and this offsets the mortgage payments.

:)

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Getting closer...

Real reductions in interest rates encourage people to borrow, not spend, subtle but important difference.

exactly, I have borrowed a lot at lower IRs to spend abroad (India) where IRs are high. Doesn't help the UK economy at all.

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Getting closer...

Real reductions in interest rates encourage people to borrow, not spend, subtle but important difference.

Real falls do encourage them to save, or repay faster if they can.

There is a floor to how low banks can set rates and that is 0%.

It encourages them to spend their savings and also as you say borrow money, which they spend.

Real increases encourage them to save (FWIW Repaying debt is saving)

Indeed 0% is as low as a bank can go, and if you get deflation it can be very very hard to get out of the cycle of prices falling, leading to more saving, leading to higher unemployment and more deflation, leading to more saving.

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exactly, I have borrowed a lot at lower IRs to spend abroad (India) where IRs are high. Doesn't help the UK economy at all.

I should have rather said 'invest' instead of 'spend'

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It encourages them to spend their savings and also as you say borrow money, which they spend.

Real increases encourage them to save (FWIW Repaying debt is saving)

Indeed 0% is as low as a bank can go, and if you get deflation it can be very very hard to get out of the cycle of prices falling, leading to more saving, leading to higher unemployment and more deflation, leading to more saving.

Agreed...

So as we recover ever more of the cheap/easy oil leaving the tricky/expensive stuff till last. Fuel and electricty will cost more in terms of oil.

It takes more energy/oil to recover the same amount of energy/oil than it did 30 years ago, this trend will continue as we move to more difficult to recover reserves from deeper seas & lower pressure reserves. (technology helps ease this pain but it can only do so much). This means in the future everything will cost more in terms of oil.

i.e. It will take ten barrels of oil to mine a tonne of copper where it used to cost five barrels.

This is the basis of the energy crisis. It is more fundemental than supply & demand, and currency it's goes as far as physical science and technology.

This means that inflation is coming in droves, it is just very difficult to say when, but we are seeing commodity spikes now...

This means central banks need people to be more solvent, else we will see a big spike in bad debts. They are acting the world over already.

Margins will be squeezed in the coming years and labour needs to cost less than the commodities. Hence job exportation.

.

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Inflation and interest rates :Is there a link between the two ?

Yes

Interest rates are one of the tools used to keep inflation under control. But there are many tools and factors and although interest rates are probably the most direct method in the economic armoury it is a very clumsy tool with differing effects dependant on the economic situation and pervailing factors.

A decade ago interest rates were associated with their effect on industry especially manufacturing, but these days it is mainly concerned with property.

A rise would cause prices to drop and a fall would help keep prices stable or possibly see futher rises! because the market has been stretched to its limit and relatively small changes would make a significant difference. This is why you see such polarized views from Bulls and Bears because of its importance to likely HPI

I believe rates are not likely to see any changes soon, with Gordon Brown and various other domestic VIs putting pressure on lower rates but there are pressures building on the international money markets for rises (inflation in Japan etc) and this global pressure together with the problem of imbalances in currencies etc and the debt already taken up may make rises inevitable. (You can tell a property Bull from a Bear on how they answer this question)

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  • 301 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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