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David Smith: Higher Inflation Doesn't Mean Higher Interest Rates?

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Hello everybody,

I was posting on David Smiths (The Times economic editor) www.economicsuk.com site when I noticed this little gem from David:

"Inflation goes up, then the repo rate goes up. Simple." -- is a fundamental misunderstanding of the way monetary policy works.

Is that right Mr Smith? So an increase inflation and us expecting a rate rise is a misunderstanding on our part? How strange.

Mervyn King's (MPC main dude) comments come in handy here:

'I think a number of people in the last six months have been talking as if the MPC were targeting total demand or, even more oddly, targeting retail sales and consumer spending. We are not. We are trying to target inflation. We have an inflation target.'

Something is not right here. One on hand we have Mervyn King telling us we clearly have an interest rate target policy then we have David Smith telling us that this is not quite right. Something smells rather fishy David...

David Smith of course was recently complaining about the repo rate rise, the one he thought wasn't going to happen despite rising inflation. In fact he has rather underestimated inflation and oil prices over the last few years.

Something is not right here. Am I missing somethings guys or is David going off the rails? Or am I losing the plot somewhere? Comments welcome.

:huh::huh:

You can post on David's site if you like too.

www.economicsuk.com

Go the the article 'Reasonable decision - poor signalling' and post away. No registration required, just a good sense of humour.

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Hello everybody,

I was posting on David Smiths (The Times economic editor) www.economicsuk.com site when I noticed this little gem from David:

"Inflation goes up, then the repo rate goes up. Simple." -- is a fundamental misunderstanding of the way monetary policy works.

Is that right Mr Smith? So an increase inflation and us expecting a rate rise is a misunderstanding on our part? How strange.

Mervyn King's (MPC main dude) comments come in handy here:

'I think a number of people in the last six months have been talking as if the MPC were targeting total demand or, even more oddly, targeting retail sales and consumer spending. We are not. We are trying to target inflation. We have an inflation target.'

Something is not right here. One on hand we have Mervyn King telling us we clearly have an interest rate target policy then we have David Smith telling us that this is not quite right. Something smells rather fishy David...

David Smith of course was recently complaining about the repo rate rise, the one he thought wasn't going to happen despite rising inflation. In fact he has rather underestimated inflation and oil prices over the last few years.

Something is not right here. Am I missing somethings guys or is David going off the rails? Or am I losing the plot somewhere? Comments welcome.

:huh::huh:

You can post on David's site if you like too.

www.economicsuk.com

Go the the article 'Reasonable decision - poor signalling' and post away. No registration required, just a good sense of humour.

I suspect that what he means is that only some sources of inflation are influenced by interest rates, so higher inflation doesn't automatically mean that the BoE will respond with higher rates. The MPC has to assess what is driving inflation and whether higher rates will produce a deflationary effect to counter it. If that isn't the case then they'd prefer to ride out the inflation (until businesses and consumers shift demand away from the good that is rising in price) or look to the chancellor to tacle it using fiscal policy or supply-side policies. They won't raise the base rate unless they think it will actually help them meet the inflation target.

Having said that, David Smith does seem to err towards no rate rises even when the evidence strongly suggests otherwise...

EDIT: Having actually read his comments he seems to be arguing that policy lags are the reason why the BoE didn't need to raise rates last week. Call me simple, but presumably policy lags implying acting in advance of inflation. Given that they haven't had rates up at 4.75% for almost 2 years, is he seriously suggesting that the BoE actions 2 years ago were intended to tackle the inflation that we're seeing now? :blink: Merv is good but not that good!

Edited by IamSpartacus

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I suspect that what he means is that only some sources of inflation are influenced by interest rates, so higher inflation doesn't automatically mean that the BoE will respond with higher rates. The MPC has to assess what is driving inflation and whether higher rates will produce a deflationary effect to counter it. If that isn't the case then they'd prefer to ride out the inflation (until businesses and consumers shift demand away from the good that is rising in price) or look to the chancellor to tacle it using fiscal policy or supply-side policies. They won't raise the base rate unless they think it will actually help them meet the inflation target.

Having said that, David Smith does seem to err towards no rate rises even when the evidence strongly suggests otherwise...

Yes, I understand that he is attempting to look at the situation in a more detailed manner but I think he has lost focus. The BOE have a clear inflation target mandate.

I agree his predictions have been WAY off.

:o

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I suspect that what he means is that only some sources of inflation are influenced by interest rates, so higher inflation doesn't automatically mean that the BoE will respond with higher rates. The MPC has to assess what is driving inflation and whether higher rates will produce a deflationary effect to counter it. If that isn't the case then they'd prefer to ride out the inflation (until businesses and consumers shift demand away from the good that is rising in price) or look to the chancellor to tacle it using fiscal policy or supply-side policies. They won't raise the base rate unless they think it will actually help them meet the inflation target.

Having said that, David Smith does seem to err towards no rate rises even when the evidence strongly suggests otherwise...

If you weren't speaking about David Smith, I would agree... ;)

Some of his arguments against rate rises are quite amusing. Well they would be amusing if he didn't claim to be an economics "expert..."

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If you weren't speaking about David Smith, I would agree... ;)

Some of his arguments against rate rises are quite amusing. Well they would be amusing if he didn't claim to be an economics "expert..."

Only the other month he was talking about a cut in interest rates.

:lol:

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Only the other month he was talking about a cut in interest rates.

:lol:

Not just him - apparently Richard Lamberts was surprised by the decision too... (the only non-economist ever to have been appointed to the MPC :ph34r: )

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I've just read the blog. It's unreal how ignorant this guy is. He can't just admit that he got it wrong - and quite frankly he must be used to getting it wrong by now - he just starts spouting some completely irrelevant bolleaux to try and support his argument.

Poor confused soul... :lol:

Another couple of rate hikes and he still won't get it...

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Guest Alright Jack

The reason for all this dissonance is because the Bank of England are saying one thing but doing another. This leads to mass confusion in the general public in which I include the media itself - deliberate? You decide.

Here is the mismatch,

Bank says it is targetting inflation* (supply) which is not true as the M4 figures prove beyond question. What the Bank really does is use Interest Rates to target the demand for the currency which, in turn, will affect the relative strength of the currency in relation to others and good and services which will obviously impact price levels.

The whole purpose is to endow governments with a blank public cheque. Price increases can be blamed on someone else whereas increasing money supply cannot and this is why we play this childish game of cat and mouse.

*Even if we accept the nonsense idea that inflation is 'rising prices' (rather than currency supply) the bank is still targeting demand (rather than prices) first and foremost.

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It just get's better from David,

Quote from yesterday evening on www.economicsuk.com

By the way, I've not underestimated inflation and interest rates.

This guy has been calling for a cut in rates for ages...

:lol:

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It just get's better from David,

Quote from yesterday evening on www.economicsuk.com

By the way, I've not underestimated inflation and interest rates.

This guy has been calling for a cut in rates for ages...

:lol:

:lol:

scribble.GIF

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He was doing a starter course in "understanding the basics of economics" with his bizarre Times colleague Kaletsky the Klown over the wekend so was unavailable for comment

I'm sure this guy must know some economics. He's got a hidden agenda... Some ulterior motive...

:o

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  • 302 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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