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Johnny Cash

Interest Rates & Energy Price Inflation

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Hi, theres something I dont quite understand about the tool of higher interest rates being used to temper inflation.

I can see that if the economy is overheating due to excesssive high street spending then higher interst rates will reduce the amount of disposable income people have and put the brakes on a bit. If as in the present case, most things causing higher inflation (oil prices, energy prices, council tax bills etc) are essentials and not consumer goods, how will raising interest rates combat this sort of inflation? Maybe all this talk of stripping out inflation caused by the above might have a good reason behind it.

Just for the record Im bearish about house prices and do believe that the inflation figures should reflect the true rise in the cost of living not massaged as they are now and weighted with items that are reducing in price.

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Well, this is the problem: the entire world has been indulging in an easy credit boom... the inevitable end result of which is high inflation in things like oil and gas that can't be printed.

Raising rates would at least increase the value of the pound, which would reduce the cost of energy in pounds. That's about the best we can hope for.

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Interest rates do not actually directly affect inflation. Infaltion is caused by an excess supply of money in the economy which effectively means too much money chasing too few goods, hence prices rise. (MV=PQ is the formula if you're interested)

Interest rates control the supply of money as if they go up then it becomes more expensive to borrow and better to save (which eventually means buying BOE bonds either yourself or through proxies such as your retail bank)

This is why the government adopted the "core"infaltion model on the basis that there were some kinds of inflation they could not control (Gas, Oil) although they were happy enough to take the credit when the prices of these commodities fell cynics might say.

Raising interest rates will offset inflation overall by reducing inflation in other areas, however if the price of oil goes up then the price of petrol goes up so this is beyond the BOE's control. However the idea is no longer to control infaltion but people's expectations of inflation to prevent "wage push" inflation to prevent an inflationary spiral which is why the wage growth figures will continue to be more key in deciding monetary policy.

I think I may have gone a little off the point there. Did that answer your question at all?

C

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However the idea is no longer to control infaltion but people's expectations of inflation to prevent "wage push" inflation to prevent an inflationary spiral

In that case, they're deliberately and openly setting out to destroy the living standard of the British people. Boy are they going to be in trouble once Joe Sixpack finally realises what they're doing.

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In that case, they're deliberately and openly setting out to destroy the living standard of the British people. Boy are they going to be in trouble once Joe Sixpack finally realises what they're doing.

Yes, that is exactly what is going on. People are going to be furious when they find out - they will ask - "why did you encourage us to take on so much debt now that as a result of rising inflation we have no money left to pay it off?"

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Yes, that is exactly what is going on. People are going to be furious when they find out - they will ask - "why did you encourage us to take on so much debt now that as a result of rising inflation we have no money left to pay it off?"

ffs, when will someone (or organisation) with any clout, question why we are being lied to about real inflation.

are all public sector workers happy to accept their 2% payrise whilst shelling out 10 - 20% more on the cost of living ?

when will they grow some balls and start banging on the door ?

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ffs, when will someone (or organisation) with any clout, question why we are being lied to about real inflation.

are all public sector workers happy to accept their 2% payrise whilst shelling out 10 - 20% more on the cost of living ?

when will they grow some balls and start banging on the door ?

I guess they are all in on it and don't want to rock the boat until they've lined their pockets...

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I've started to bang on about this at work.

Some people have started to notice that gas & petrol is getting pricey, but GUESS WHAT - they blame profiteering companies! So the diversionary spin is working....

Anyhow, I got 5% increase this year, compared to 3% last, and previously. So stick that Gordy.

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are all public sector workers happy to accept their 2% payrise whilst shelling out 10 - 20% more on the cost of living ?

actually I think energy companies have been very sneaky on this - raising prices 3 times in the year by 20% ish (sorry - this is not exact - but not the point)..which compounded over the year would be over 70% increase.

I think somehow are brains are conditioned to think of price rises in terms of a year period -so 3 rises in a year still our brains are focused on the figure (of between 10 and 20%) - and dont work out the compounded increase.

Edited by acidrob

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HPI has been been large enough over the last few years to cover the increased cost in living expenses - so those with property - in balance - have had no complaints. Unfortunately, its only the poorest - and those who dont own property that are really feeling the inflation biting - the rest can MEW if need be. IF house prices do fall AND inflation continues - then we will start to see some unrest.

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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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