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Official Inflation Figures And Savings Risks

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A while back there was a lot of debate around the main factors affecting house price inflation. The key variable seemed to be interest rates and most here agreed that other factors like demographics, GDP etc were more weakly correlated. I am therefore surprised to see the mainstream press is giving little attention to official inflation figures.

Some press article have suggested the recent increase in base rates was not justified because increasing inflation should not always result in increasing interest rates. Perhaps I’m being dumb, but I thought interest rates were set by lenders and that their expectations increase in line with inflation?

Borrowers have two sources for loans, lenders of ‘old’ money, and lenders of ‘new’ money created by the central banks, both expect returns on their lending, with expectations set by inflation figures. In a well managed country banks increase the amount of ‘new’ money in circulation to allow for increasing Gross Domestic Product (GDP). If the money supply greatly exceeds the increase in GDP then the currency is effectively devalued.

The official inflation index is the so called Consumer Price Index (CPI) which currently stands at 2.5% , this exceeds the governments’ own target of 2%. Of course CPI is a cheat and the ‘real’ rate is better measured by the “GPD deflator” which is reported by the Treasury – their current predictions are 2.7% for next year, and 2.7% for several years after that. The official data are given on the site below, however, note the comment about them choosing the ‘lower bound’ and not ‘mid point’ from their statistical models:

http://www.hm-treasury.gov.uk/economic_dat...a_gdp_index.cfm

That means we are officially entering a period when inflation exceeds the official target by a significant margin. Worse still, others feel both the CPI and GDP deflator fail to account for the real effect of price increases and that each pound that is saved deflates faster than the 2.7% being reported: perhaps others can post some examples! Thankfully, some journalists have spotted the game as shown in the telegraph article below:

http://www.telegraph.co.uk/opinion/main.jh...7/28/do2802.xml

While its good to see good reporting, the problem may be more serious than is portrayed in the article above. In reality, the BoE are currently fuelling inflation by increasing the money supply faster than the economy is growing, just look at the M4 stats below and you will see a very worrying picture! How can growth of 13% be justified?

http://www.forbes.com/markets/feeds/afx/20...afx2892350.html

It seems rich of anyone to suggest that UK inc. can keep on printing money and as a result artificially devalue the currency (within the UK market) while at the same time suggesting lenders should not be rewarded with higher interest rates. It makes me wonder when the wheels are going to fall off the chariot and the horses drop dead.

The BoE obviously realise the lending market won’t accept artificially low base rates and it’s not beyond imagination to think the MPC were spooked into increasing rates at the last round. Why? If the BoE fail to keep track of US rates while at the same time pumping M4 steroids into the economy then at some point lenders will refuse to lend to the UK. At that point, the market will seek out higher rates here in the USA which could spell disaster – Why? because it would undermine the Federal Reserves’ efforts to prevent a recession by devaluing the dollar and boosting exports. My punt is the Fed told the MPC to get inline and that there are rough times ahead for the U.K. If there’s a conflict between the U.S., who are seeking to prevent recession, and the U.K., who are bolstering the housing market, then guess who will loose!

We spoke of the reasons why the Fed would stop reporting M3 and the UKs increase in M4 would seem to suggest we were correct. Is it just me who thinks the government are about to inflate away the housing bubble, and that savers are being made to pay by keeping interest rates low.

If others agree, then should our investment portfolios be weighted towards international stocks and commodities?

BPW

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However, they are also inflating our wages away. Therefore, relatively speaking, the debt is just as big as it ever was.

Effectively the debt is _BIGGER_ because your disposable income is lower after paying higher taxes and higher charges for essential items.

High price inflation with low wage inflation is an absolute killer, particularly for those with big debts.

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The housing bubble can only truly be inflated away by wage increases that keep up with real inflation.

If the government keeps increasing the money supply at 13%+ p.a. but reporting inflation as being 3%, then they may indeed be inflating the bubble away. However, they are also inflating our wages away. Therefore, relatively speaking, the debt is just as big as it ever was.

Thats part of my concern. Is there evidence that wages are rising in line with the real rate of inflation?

Arnt you all staggered that M4 is increased by 13% - what does this really mean for us all?

Edited by bpw

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I reckon the M4 could do with doubling to six lanes each way :D

what is the difference between m1 m2 m3 an m4 money supply an is this standard used in every country around the world?

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A while back there was a lot of debate around the main factors affecting house price inflation. The key variable seemed to be interest rates and most here agreed that other factors like demographics, GDP etc were more weakly correlated. I am therefore surprised to see the mainstream press is giving little attention to official inflation figures.

Some press article have suggested the recent increase in base rates was not justified because increasing inflation should not always result in increasing interest rates. Perhaps I’m being dumb, but I thought interest rates were set by lenders and that their expectations increase in line with inflation?

Borrowers have two sources for loans, lenders of ‘old’ money, and lenders of ‘new’ money created by the central banks, both expect returns on their lending, with expectations set by inflation figures. In a well managed country banks increase the amount of ‘new’ money in circulation to allow for increasing Gross Domestic Product (GDP). If the money supply greatly exceeds the increase in GDP then the currency is effectively devalued.

The official inflation index is the so called Consumer Price Index (CPI) which currently stands at 2.5% , this exceeds the governments’ own target of 2%. Of course CPI is a cheat and the ‘real’ rate is better measured by the “GPD deflator” which is reported by the Treasury – their current predictions are 2.7% for next year, and 2.7% for several years after that. The official data are given on the site below, however, note the comment about them choosing the ‘lower bound’ and not ‘mid point’ from their statistical models:

http://www.hm-treasury.gov.uk/economic_dat...a_gdp_index.cfm

That means we are officially entering a period when inflation exceeds the official target by a significant margin. Worse still, others feel both the CPI and GDP deflator fail to account for the real effect of price increases and that each pound that is saved deflates faster than the 2.7% being reported: perhaps others can post some examples! Thankfully, some journalists have spotted the game as shown in the telegraph article below:

http://www.telegraph.co.uk/opinion/main.jh...7/28/do2802.xml

While its good to see good reporting, the problem may be more serious than is portrayed in the article above. In reality, the BoE are currently fuelling inflation by increasing the money supply faster than the economy is growing, just look at the M4 stats below and you will see a very worrying picture! How can growth of 13% be justified?

http://www.forbes.com/markets/feeds/afx/20...afx2892350.html

It seems rich of anyone to suggest that UK inc. can keep on printing money and as a result artificially devalue the currency (within the UK market) while at the same time suggesting lenders should not be rewarded with higher interest rates. It makes me wonder when the wheels are going to fall off the chariot and the horses drop dead.

The BoE obviously realise the lending market won’t accept artificially low base rates and it’s not beyond imagination to think the MPC were spooked into increasing rates at the last round. Why? If the BoE fail to keep track of US rates while at the same time pumping M4 steroids into the economy then at some point lenders will refuse to lend to the UK. At that point, the market will seek out higher rates here in the USA which could spell disaster – Why? because it would undermine the Federal Reserves’ efforts to prevent a recession by devaluing the dollar and boosting exports. My punt is the Fed told the MPC to get inline and that there are rough times ahead for the U.K. If there’s a conflict between the U.S., who are seeking to prevent recession, and the U.K., who are bolstering the housing market, then guess who will loose!

We spoke of the reasons why the Fed would stop reporting M3 and the UKs increase in M4 would seem to suggest we were correct. Is it just me who thinks the government are about to inflate away the housing bubble, and that savers are being made to pay by keeping interest rates low.

If others agree, then should our investment portfolios be weighted towards international stocks and commodities?

BPW

Whilst I don't necessarily agree with your prognoses, that was a good precis of the inflationist viewpoint. I am reminded of The Great Inflation of 20s Germany and how the massive outflow of wealth from the Mark caused asset bubbles in all kinds of international assets. Undoubtedly the deployment of funds necessary to take advantage of such a situation, both in respect of timing and asset classes, will be anything but straightforward. Chances are US investors will be repatriating funds on risk aversion, whilst others simultaneously seek an inflation haven outside the US. The cross currents will likely mean winners will be thin on the ground... The chielf problem for anyone playing this theory will be faith in their understanding of Fed policy. With a new man in the hot seat, it will take those of a religious bent to ride out counter trends.

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High price inflation + erosion of earnings + erosion of savings + still gargantuan increases in debt will lead to a depression.

Just like the last time the same central bank tactics were used in the states to paint the tape and run the economy on little more than the feelgood factor.

Edited by OnlyMe

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it's a good job they invented computers, because without computers money would really have to be printed manually.

if it had to printed at the current rate, then we would have to import the whole of poland to get the job done.

they can invent money digitally so it's easy.

I can just see mervy changing the ribbon.

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it's a good job they invented computers, because without computers money would really have to be printed manually.

if it had to printed at the current rate, then we would have to import the whole of poland to get the job done.

they can invent money digitally so it's easy.

I can just see mervy changing the ribbon.

great posting!~

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Guest Alright Jack

The denial of inflation on this site is spellbinding.

Well done OP for spotting what the 'cash is king' crowd cannot accept: "The wolf in sheep's clothing" - Inflation disguised as debt.

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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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