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Inflation Up And Interest Rates - A Thought

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There have been three points made at various times on this forum that all have some credience. They are;

1) That interest rates will have to rise to contain inflation;

2) That inflation target will be relaxed to avoid damaging jobs/growth too much;

3) That peak oil will drive inflation to hyper levels.

I think that oil prices are the key. zceb90 provided some very interesting information on the following thread;


This ties up with many articles that I have read from other sources over the last 18 months or so. These all suggest that oil prices are likely to continue their rise for quite sometime to come. True Geo-political issues have had an effect, but they appear to be short term in nature, but the long term trend is up. This upward trend as been going on for the last 7 or so years, which strongly suggests a change in the supply / demand balance. Given the growth in India and China and their huge populations, which suggest that they still have a lot of growth potential, the growth in demand for oil is unlikely to slow anytime soon. If this is the case then the price of oil has a long way to go yet. $100+ could well yet be achieved in the near term, say sometime next year. If this should happen then it is unlikely that inflation will remain within the target ranges of Western Central Banks without hugely damaging rises in interest rates.

I think that a more realistic scenario is that the inflation rate targets of the Western world will be relaxed, but that inflation and interest raters will continue to rise. Why? Well the off setting influence in the inflation figures has been cheap inports from the Far East. The problem is that the huge growth in the Far East has lead to a rapidly growing 'middle class' of serious energy consumers in those countries. That middle class is now enjoying Western sytle living standards, which they are going to be very reluctent to give up. As energy prices rise they are going to demand higher wages, thus cutting off the deflating effect of cheap labour. (It will be very difficult to move factories to cheaper rural areas, as the factories companies have already built may not, yet, have paid for themselves!)

In fact, if energgy prices continue to rise as quickly as they are it may become inpractical to ship some good, half way around the world, because shipping cost will more than cancel the labour cost benefits!

That means that inflation will continue on its upward trajectory because energy prices will eventually drive all other prices upwards.

So I am coming around to the possibility that inflation will move beyond the current targets, interest rates will still rise in an effort to prevent the most extreme levels of inflation. As inerest rate rise the affordability levels of the current housing market will be exposed, hence a HPC will occur.

On the plus side manufactoring may yet start to move closer to the consumer markets. Unfortunately, I think the on set of the latter process will only e after a very painfull experience.

OK they are slightly rambling thoughts, it is Sunday evening, I am well into a bottle of wine, but I have been thinking about this for awhile. Your thoughts would be welcome.

Edited by FTBagain

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I agree with much you say, but feel interest rates would be lowered after being raised in a first wave of attack on inflation. This would make the pound less attractive and make imports more expensive and exports more attractive. The UK economy being so influenced by HP that inflation would be allowed to rise rather than see interest rates rises bring about an enormous recession

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There is a feedback mechanism for oil. If the US (and thus world) goes into recession the demand for oil will fall, and hence the price.

I think you also massivly overestimate both the wages in the developing world and the costs of shipping, even if the price of oil doubled.

Still, one key point is that cost of imports is not going to get cheaper in the way it has over the last 10 years. While I don't think we are going to import that much inflation from Asia (without currency fluctuations) we are certainly not going to get the deflationary benefits we have been acustomed to.

Of course, the stats can be fiddled. An 80GB ipod selling for the same prices as a 40GB ipod is clearly deflation of 50%. Yes, they do use some of this logic in inflation figures (just not quite that bad).

Try saying that after a bottle of wine... :lol:

What does the word mean? Neither dictionary.com or wikipedia.org had an entry.

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What does the word mean? Neither dictionary.com or wikipedia.org had an entry.

He's referring to Nicolai Ceaucesceau, former Romanian dictator. Hence Ceaucesceau-ian, meaning like Ceaucesceau. Not entirely sure what parallel he's trying to make though...

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My thoughts on it are much the same and you've expressed it well.

The bit I don't get is:

The BOE are supposed to set the base rate in line with a two year forecast/outlook for inflation.

Yet, each month, much is made of the CPI figure *that month*, the various vested interests get their piece in, and then all eyes look to the BOE to see what it does.

Meanwhile the BOE seems to indicate that "there might be some inflation coming"; "there are upside risks"; "the base rate might need to go up". Maybe. Perhaps.

I did post a while back wondering why Brown wouldn't simply raise the CPI target to 3% to keep his miracle going and raising the target might well be on the cards now if the US is going to do it too.

Just in the last few weeks the press seem to have woken up to the inflation fiddle and begun to print articles about it, and people are surely beginning to realise it now.

Brown has already launched the pre-emptive strike with regard to pay hikes, pegging them to CPI, so I wonder if we'll start to see the mother of public sector pay strikes over the next few years.

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