The Business: Inflation Jumps Back From The Grave.

[CrashConnoisseur]

'Inflation jumps back from the grave':

http://thebusinessonline.com/Stories.aspx?...3F-B34C47E5ADAC

All over the world, consumer prices are on the rise again and, with real interest rates still remarkably low, central banks everywhere must regain control of the situation before it is too late.

Once ever-accelerating consumer prices become ingrained into an economy and national psyche, inflation becomes extremely difficult to root out without a nasty recession. But overkill is just as bad as neglect; so it is vital that the authorities manage their rate hikes carefully. The present situation is dangerous because two trends are in conflict: consumer price inflation is increasing, inflation-adjusted interest rates remain very low and liquidity levels globally continue to grow at a ridiculously fast rate but the global economy, led by the United States, is beginning to slow and there are many asset bubbles ready to be punctured.

[...snip...]

Why is inflation, which was supposedly dead, now climbing out of its grave across the Western world? Central bankers must take much of the blame: because they have been trained to focus exclusively on the behaviour of consumer prices (in Great Britain and many other countries they are legally obliged to do so) they fail to understand that what really matters to the economy is the amount of credit and money that is available and excess liquidity need not lead to changes in consumer prices if the money ends up instead forming a bubble in asset prices, distorting the economy and storing up trouble in the process.

Corporate pricing power has largely vanished, especially for tradable goods and services thanks to freer trade and cheap communications. Prices are set in global markets and any company that deviates quickly loses market share. So huge injections of liquidity into the economy (via low interest rates) no longer automatically mean higher consumer prices; instead, the money increasingly spills into asset prices, which are far more flexible. These days, inflation is best described as a case of too much money chasing not only too few goods but, crucially, too few assets.

[...snip...]

The latest monetary data show rampant money and credit growth in Britain -- up 13.7% and 14% respectively in the year to June, both 15-year peaks. The money holdings of non-bank financial institutions, a key link in the transmission of money growth into asset prices, are powering ahead -- up 24.5% in the year to May, according to calculations from Lombard Street Research. Given its traditional lack of interest in such matters, it was therefore an important step in the right direction to see the Bank of England citing "rapid growth of broad money and credit" as one of its reasons for last week's rate hike.

[...snip...]

After many years of allowing an excess build-up of liquidity in their economies, the Fed, the Bank of England and other central banks must now face their day of reckoning. To avoid a resurgence in consumer price inflation, they need to tighten monetary policy significantly without triggering a recession or an asset price crash, which is easier said than done. Their goal should be to manage the global economy's looming slow landing while allowing house prices and other asset bubbles slowly to readjust to reality. The stakes are high: if the central banks do either too much or too little, a nasty case of stagflation -- economic stagnation combined with inflation -- is the most likely prospect.

[dnd]

Yep, just about everything covered in there - nice article

A difficult balancing act of controlling inflation without crashing the housing market with STAGFLATION as a possible outcome...

Edited August 5, 2006 by dnd

[dnd]

It's difficult to see how just one or two 0.25 rate rises here are going to be enough to arrest inflation with 'rampant money and credit growth in Britain' still going on - more hiking like the FED must be surely be inevitable especially as we normally have slightly higher rates than them.

The 0.25% rises are just "testing the water" - they know as much as we do as to how the masses will react - you've dealing with unmeasurable human behaviour....

[Badlad1967]

Possibly true - it seems unbelievable that a tiny 0.25 rise could have such an affect on people and just goes to show how affected many people are due to being maxed out already with mortgages//debt with hardly (if any) slack left. But then we should'nt be surprised as we've had energy rises already which essentially have the same affect so it's one of those double-whammy's which really hurt home owners.

Couldn't agree more. But it's also a question of SENTIMENT. Now people are beginning to realise that interest rates can go up (people have such short memories!!!). This fact is what is causing the VI's to start to panic. Wait for the (even more) ridiculous press releases.

[tinecu]

'Inflation jumps back from the grave':

http://thebusinessonline.com/Stories.aspx?...3F-B34C47E5ADAC

Great post. That's pretty much the status quo as I see it. the CPI version of inflation has already out paced asking prices according to Home.co.uk...

See:http://www.home.co.uk/asking_price_index/HAPIndex_JULY06.pdf

Stagflation

[MarkG]

But it's also a question of SENTIMENT. Now people are beginning to realise that interest rates can go up (people have such short memories!!!).

Just wait for the next interest rate rise: then they'll really be squealing.

[jonewer]

Couldn't agree more. But it's also a question of SENTIMENT. Now people are beginning to realise that interest rates can go up (people have such short memories!!!). This fact is what is causing the VI's to start to panic. Wait for the (even more) ridiculous press releases.

Its also a matter of the margins on BTL properties. A 0.25% Base Rate rise can easily translate into a larger rate rise on the mortgage. The One Account raised its rates by 0.35% for example. This is going to further erode any yiled from BTLs and prospective BTLs.

First sign of this taking effect should be a fall in the price of Studio, 1 and 2 bed flats. The BTLs favourites.

Drops in the value of flats should then knock on to the price of terraces and semis as people realised falts can be decent value again.... and so on.

[gfromls]

May I heartedly recommend that everyone reads this……….. it’s a frickin masterpiece.

[Without_a_Paddle]

I agree, that is a well written article.

BTW don't forget that many recent mortgages are fixed rate.

Those on variable rate loans will feel it, but those on fixed rates will be OK.

I wonder how many people are rushing out to remortgage to a fixed rate...?

Edited August 6, 2006 by Without_a_Paddle

[Assurbanipal]

I agree, that is a well written article.

BTW don't forget that many recent mortgages are fixed rate.

Those on variable rate loans will feel it, but those on fixed rates will be OK.

I wonder how many people are rushing out to remortgage to a fixed rate...?

Fixed rate mortgages are ok for customers, but very danger for lenders. IF we will have an period of stagflation, taking into consideration amount of debt, weaker lenders could collapse (as incomes from installments from fixed rate loans will shrink). After weaker lenders the time will come on stronger ones. Amount of debt is historical, higher than during Great Depression, when tousands of banks collapsed.

When credit bubble bursts, nobody will be safe.

[MarkG]

Fixed rate mortgages are ok for customers, but very danger for lenders.

And it really doesn't matter what mortgage you have if the value of your house is dropping 20k a year: you'll want to sell before it gets worse, but if mortgage rates are 8-10%, who's going to buy it off you?

[oracle]

I agree, that is a well written article.

BTW don't forget that many recent mortgages are fixed rate.

Those on variable rate loans will feel it, but those on fixed rates will be OK.

I wonder how many people are rushing out to remortgage to a fixed rate...?

the fix could end up a double-edged sword.

this could distort how much IR's need to rise in real terms until the fixed period has fully unwound.

we saw maybe a little of that last year as many folks entering the market got mega-cheap 2 year deals.

the IR cut last year might have offset that a little.

but what about the 5-year fixed deals,many due to expire in 2007/8.these guys may have absorbed the utility bill rises for now,but the shock of going from 4% interest to 6.5%SVR will cripple them.

...include many BTL in this category.couple this with a moderate price fall and all hell will break loose!!

add in a few voids and a bit of unemployment and the risks look HUGE!

[IamSpartacus]

but what about the 5-year fixed deals,many due to expire in 2007/8.these guys may have absorbed the utility bill rises for now,but the shock of going from 4% interest to 6.5%SVR will cripple them.

Why would they stay on the SVR instead of remortgaging? And they'll have had 5 years of earnings growth...