Wednesday: Boe Inflation Report

[Zzzzzzzzzzzzzzzzzzzzzzzzzz]

Just three months ago, a BoE agent told me that he could see CPI increasing a bit - to around 2.4 - and then falling back to 2 before the end of the year. Oh dear

[faloos]

I think this is where the BoE is wrong and why interest rates are headed higher than we believe now;

I don't think we've even begun to see the inflation caused by higher energy costs - these are still being absorbed by companies and not passed onto consumers but they will. Oil has gone from $10 - $78 since 1996 - are you telling me that we've felt the inflation impact of this yet!? As Stuart Rose of M&S recently said - the period of ever reducing prices is near an end. And import inflation, the cheap goods that we import aren't going to get cheaper forever - there is evidence that we are already at the turning point and import prices for goods will actually rise.

When the head of M&S says that retail prices are about to start rising we should listen. When retailers start to pass on prices for higher energy costs, higher staff costs, higher land costs, higher goods costs then inflation is going a lot higher and interest rates will have to follow.

You know exactly what you are talking about because you deal with facts !! and yes as I have said many times on this site before companies that are cash rich have been keeping or subsidising increased costs to prevent them putting up their factory gate prices but they cannot do that forever as they will run out of cash. BOE know this and all they are doing is "conditioning the public" for further increases .

[dnd]

I think you'll find they just did

0.25% is a bluff - they didn't want to even do that - they are just scaring people into stopping borrowing/spending - wage surpression through immigration hasn't worked so far

If the public call their bluff and continue borrowing/spending - I reckon they will redefine/hide 'inflation' rather than continue to raise IR and risk crashing the housing market

They've been hiding real inflation from the thick public for years - why change?

Edited August 9, 2006 by dnd

[FreeFall]

I may be wrong about this, but if the M4 money growth drops dramatically (i.e. the credit tap is switched off) then wouldn't inflation be rampant? If my understanding is correct, the current low prices are a function of volume as well as source.....if volume drops dramatically (i.e. people can't get the money to buy them any more) wouldn't the prices rise by default almost?

Probably multiple flaws in my logic

[Guest wrongmove]

I may be wrong about this, but if the M4 money growth drops dramatically (i.e. the credit tap is switched off) then wouldn't inflation be rampant? If my understanding is correct, the current low prices are a function of volume as well as source.....if volume drops dramatically (i.e. people can't get the money to buy them any more) wouldn't the prices rise by default almost?

Probably multiple flaws in my logic

I am no economist, but in general, low demand leads to lower prices, and high demand puts upward pressure an prices.

[Willy Weasel]

I've just finished reading the BoE report all the way through. The thread that seems to run through the report is that the BoE's IR decisions are dictated by people's expectations of CPI going forward ie if people believe CPI will be higher in the future then the Bank will raise interest rates until people's expectations are reduced. This is because expectations of higher CPI encourage people to ask for higher pay rises. The BoE seems to be taking quite a lot of comfort from the fact that wage settlements are very low so people don't have more disposable income so can't spend more which means retailers can't increase prices.

The message from the markets is that a further 0.25% increase is expected so the Bank will make that increase in due course to keep the IR in line with market expectations. If the general expectations of CPI rise then that will be when we will see more aggressive IR rises but I don't see that happening soon (ie within the next 12 months)

[MarkG]

The BoE seems to be taking quite a lot of comfort from the fact that wage settlements are very low so people don't have more disposable income so can't spend more which means retailers can't increase prices.

Maybe someone should inform the BoE about this little thing called 'credit', which allows people to buy more stuff even though their wages are static or declining.

[OzzMosiz]

Maybe someone should inform the BoE about this little thing called 'credit', which allows people to buy more stuff even though their wages are static or declining.

and this thing called "Bankruptcy" which has been made a lot easier to carry out!!

[KickThemInThePant]

A few key points from the meeting:

"official interest rates....modest rise in rates over the next 2 years"

MPC may take "whatever action is necessary" (not to be constrained by fears regarding house prices)

Regarding impact on first time buyers: current ratio between house prices and earnings to blame, raising interest rates will have a secondary effect "prevent runnaway house price inflation"

"great deal of uncertainty about stability of house prices relative to earnings...might be some downside adjustment relative to earnings" (but not concerned as bad debt currently relates primarily to unsecured lending not mortgages)

"next few months up to the Christmas period...50:50 chance (of change in rates)"

To summarise:

1) We are now warning the markets that we intend to increase rates again before Christmas, but may change our mind if peace suddenly decends on the Middle East and oil price fall.

2) We currently intend to make further rate rises over the next 2 years and have already factored this into our forcasts.

3) This is likely to have an impact on the housing market but this not our primary concern nor responsibility.

4) As long as the masses can still meet their mortgage payments we will not desist from increasing interest rates. Problems with unsecured debt are likely to increase and should be resolved between borrower and lender, the MPC are not to blame for their stupidity.

5) A correction (crash) in house prices may well occur which will benefit first time buyers in the long term.

Let the media try to put a positive spin on this one!

[munimula]

people don't have more disposable income so can't spend more which means retailers can't increase prices.

This is where they've got it wrong.

Do they expect the retailers will just say goodbye to their profits and start subsidising their customers?

Retailers have shareholders and share prices - that's where their interst lies.

They've been absorbing costs so far and helped along by the falling cost of imported goods. They won't go on absorbing costs if it starts hiting their profit margin too much. If they do then businesses will go to the wall which is already happening - Allders, Powerhouse and the more businesses that go to the wall, the less competition and the easier for retailers to hike prices. One way or another retailers will shortly start hiking prices.

[flatnose]

betfair offering 7 to 1 odds for a .25% rise

[BrickingIt]

The 0.25 reduction in Aug last year looks a real bad move.

This seemed to prop the housing market up a little. Anyone who brought on the back of expected further movements down in interest rates will be surely pissed off.

A bit of bad job data will not look good. Anyone know when the next job data comes in (sorry dont follow the announcement dates) and what it is expected to reveal?.

Edited August 9, 2006 by BrickingIt