Are Gordon Brown's Bus Passes An Inflation-busting Scam?

[munimula]

Politicians will go to extraordinary and quite ridiculous lengths to keep the population happy.

As interest rates start to pick up across the world, the free and easy money that has been fuelling asset booms everywhere is drying up.

So inevitably, governments are clutching at straws in an effort to keep the party going for as long as possible. In Saudi Arabia, investors are to be given the chance to take a state-sponsored punt on the stock market – more on that in a minute.

Meanwhile, here in the UK, the Chancellor seems to have figured out a sure-fire way to keep inflation figures down – by issuing free bus passes..

Consumer price inflation in the UK picked up in April, and is now back at the Bank of England’s target level of 2% annual growth. The annual rate stood at 1.8% in March.

David Smith at Williams de Broe reckons that the Bank will raise the base rate to 4.75% in the summer. “There is quite a lot of potential inflation pressure in the system, not only in the UK, but globally.”

The main driver behind the jump was a rise in air fares over the Easter holiday period. Easter fell in April this year, whereas it fell in March last year.

But other less benign influences were also behind the move. Soaring electricity, gas and water bills also contributed to inflation – a trend that is likely to continue into this month’s CPI figure.

And inflation would have come in even higher – but here’s where Mr Brown comes in. According to National Statistics: “A large downward effect came from bus travel, with average fares falling following the introduction this April of free off-peak local bus travel in England for people aged 60 and over”.

So can we expect free bus travel to be rolled out across the country in the next Budget? We’re not convinced that even Mr Brown is that crafty. But even if he is hoping to use statistical sleight of hand to keep interest rates lower, he’s not likely to have much success.

One of the drivers of inflation has been the massive increase in commodity prices, and oil in particular. Oil has been a victim of the general sell-off over the past few days, but now seems to have stabilised at around $70 a barrel. That’s still about 20% higher than at the start of this year.

Meanwhile, the rout in mining stocks also lost some momentum, helped by good news for BHP Billiton and Rio Tinto.

Germany’s biggest steel mill, ThyssenKrupp, has accepted a 19% hike in the price of iron ore from the world’s biggest iron exporter, Brazil’s Companhia Vale do Rio Doce. As Bloomberg points out, the deal traditionally sets a global price benchmark.

Between them, Vale, Rio and BHP control 75% of the iron ore market. Right now, BHP and Rio are locked in negotiation with the Chinese steel industry. Chinese mills saw prices rise 71.5% last year, and they are – unsurprisingly – reluctant to accept further price hikes.

Japanese steel makers have been holding out too, but Daiwa Securities resource analyst Mark Pervan told Australian newspaper The Age that they would probably accept a similar deal quickly. He also believes the Chinese will succumb eventually.

A 19% hike would be above most market forecasts. The news battered shares in UK steel group Corus, which ended the day down 4% at 404.5p but wasn't enough to prevent BHP from falling 2% to £10.82, while Rio slipped 2% to £29.67.

The deal serves as a timely reminder that for all the fears that commodity prices have been over-inflated by speculators, there are genuine supply and demand concerns underpinning prices.

If you want to see a real bubble, you need look no further than Saudi Arabia. The country’s Tadawul stock index has more than halved in recent months – unsurprising, given that the average p/e ratio hit 47 at the market’s peak in February.

But now - as we mentioned above - Saudi Arabia’s King Abdullah has said that he wants to set up a state-backed investment fund, allowing small investors to put up to 500,000 riyals (that’s over £70,000) into the market. Investors would get to keep any gains after two years, while the state will guarantee their capital.

According to the BBC, the king “hopes the fund will bring more moderation” to the Saudi stock market.

It strikes us that allowing the entire population to stick up to £70,000 into stocks while the state carries any losses is not a recipe for “moderation”.

In fact, it seems like the perfect way to pump up another massive bubble which will no doubt explode in everyone’s faces once the two years is up.

Maybe the king should stick to handing out bus passes.

[munimula]

I've just come to a conclusion.

Gordon Brown gave the BoE independence in 1997 which many have applauded as a much needed measure. Why would a politician give away this control, what would be in it for them?

Perhaps the reason the BoE were given independence is because GB knew that he could control the inflation rates and therefore indirectly he still has control over the BoE rate setting decisions as the BoE is targetting the inflation rates that he is now controlling.

It all makes sense now.....

[frugalista]

I've just come to a conclusion.

Gordon Brown gave the BoE independence in 1997 which many have applauded as a much needed measure. Why would a politician give away this control, what would be in it for them?

Perhaps the reason the BoE were given independence is because GB knew that he could control the inflation rates and therefore indirectly he still has control over the BoE rate setting decisions as the BoE is targetting the inflation rates that he is now controlling.

It all makes sense now.....

Inflation is mostly about the money supply. New money is created by open market operations. New pounds are created when the BoE buys assets (usually old treasury gilts).

The BoE controls interest rates, yes. The interest rates are simply the lever which controls how quickly the commercial banks put the new money into the economy.

But who controls the open market operations which are the true source of the new money? Is that still the government?

Genuine question.

frugalista

[erd]

I don't get why the government allowed them to state that, surely it would have been better for them to just ignore that part, especially as the rate rose?

Maybe a minister was too busy with his secretary

[frugalista]

I don't get why the government allowed them to state that, surely it would have been better for them to just ignore that part, especially as the rate rose?

How do you mean?

frugalista

[rockdoctor]

Surely free bus passes are a negative tax, and should therefore be excluded from inflation calculations?

Otherwise all taxes should be included, and the massive increases in council tax (and stealth taxes) will feed through to give higher inflation.

[Mushroom]

Surely free bus passes are a negative tax, and should therefore be excluded from inflation calculations?

Otherwise all taxes should be included, and the massive increases in council tax (and stealth taxes) will feed through to give higher inflation.

You are right!

Afterall, TV licence now excluded, conveniently as it outpaces inflation, as it has been redefined as a tax.

"Free" bus passes are paid from taxation, unless bus companies have become altruistic, therefore should be discounted in CPI calculations.

[Wayo]

You are right!

Afterall, TV licence now excluded, conveniently as it outpaces inflation, as it has been redefined as a tax.

"Free" bus passes are paid from taxation, unless bus companies have become altruistic, therefore should be discounted in CPI calculations.

Raise taxes (doesn't count towards inflation) and use the money to subsidise goods and services suffering from rampant inflation. Now THAT is crafty...

I suspect the negative effect isn't from falling bus fares. As far fewer people now pay bus fares (they all have free passes) I would expect the weighting inside the inflation statisitcs has shrunk. The effect of course is the same.

I would suggest that the real reason pensioners get free bus passes, TV licences, heating fuel payments and council tax bungs is because they actually turn out to vote, whereas the young do not.

Where the price of something is geniunely subsidsed by government (negative tax) e.g milk, is the subsidy stripped out for the purpose of the CPI calculation??? I presume VAT is stripped out of purchases.

[BuyingBear]

But who controls the open market operations which are the true source of the new money? Is that still the government?

Open market operations are carried out to balance demand... and the demand comes from, you guessed it, the banks.