November M4 Data

[Guest grumpy-old-man]

No offense intended. Kids are horrendously expensive. But for the record....

I don't have kids.

I am married.

I don't have a masters.

My parents are actually very poor. I provide more financial assistance to them, than they do to me.

I have no student debt because I paid it off by working part time during my studies and working on my placement year (whice nicely straddled two tax years).

lol, it was a bit of a cheap shot by GOM. If I had more time I would have 'guessed' much better, I do seem to be really good at that game for some reason, very difficult over the old t'interweb though.

[Guest grumpy-old-man]

Anyone who thinks global commodity prices are tracking the UK's M4 money supply are seriously mistaken. Deflation will be in UK priced assets like housing only. All imported items will start the escalate in sterling price.

The pound will collapse with UK house prices.

Welcome to the poor house.

ah, someone to help me out......

thought I was all on me lonesome there for a minute.

Right then that's 2 against 22, I like these odds.

[yaakov]

Anyone who thinks global commodity prices are tracking the UK's M4 money supply are seriously mistaken. Deflation will be in UK priced assets like housing only. All imported items will start the escalate in sterling price.

The pound will collapse with UK house prices.

Welcome to the poor house.

Well yes, but I think there is probably going to be a global deflation problem.

[Crash Buyer]

Anyone who thinks global commodity prices are tracking the UK's M4 money supply are seriously mistaken. Deflation will be in UK priced assets like housing only. All imported items will start the escalate in sterling price.

The pound will collapse with UK house prices.

Welcome to the poor house.

Global commodity prices depend on global demand.

We are in a credit crunch.

IMO the list I posted above is logical and the most likely path. If you have an alternative view, I would like to see the steps laid out in the same manner.

[benj]

we are discussing the average persons look at inflation, Basic needs: gas, electric, petrol, insurance, food, clothes*, rent/mortgage costs, council tax. ALL of these have inflated, there can be no dicussion about this surely ????

...

GOM shouts at top of virtual voice: WE ARE NOT INDICATIVE OF THE GENERAL UK POPULATION.

Quite right on that last point.

Here's what I see when I "look around" at my everyday experience of prices etc.

• My rent has been static for years. Before I moved north it was higher, but was still static for years.

• Council tax seems to have grown, and I remember a couple of recent years when it really seemed to be growing unjustifiably fast. But I don't notice it all that much (perhaps I'm lucky in this respect).

• Clothes don't seem to have budged much in the last decade, although I don't buy new clothes all that often.

• I don't have a car, but the cost of petrol at the pump does seem to have rocketed. The price of diesel has also risen, which has fed through to my bus season ticket a couple of times - that's up at least 20% over the last three years, off the top of my head.

• My insurance premiums rose for a while, then dropped when I switched providers, and last year they dropped even though I just accepted my existing insurer's renewal quote.

• Food and general groceries - a mixed bag. The farm that supplied my vegetables hasn't put up its prices in many many years, although supermarket prices for veg seem to have risen. Things like tea, coffee, tinned tomatoes, and other store-cupboard items seem fairly static. Bread, cereals and dairy produce have all shot up. Meat and fish seem a lot more expensive than they were five years ago.

• On the whole, though, I've been struggling to stick to my target grocery budget over the course of this year, despite not consciously changing the pattern of things I buy. So my "personal inflation" is probably running at over 5% (finger in the air).

I do have quite a lot of cash, although not what you'd call an obscene amount. So deflation would benefit me. Still, it's a bit much to claim I therefore have a "vested interest" in deflation - because it's not like I can affect the macroeconomic environment one way or the other! That would be like saying that someone holding an umbrella has a vested interest in rain.

As has been said before by me and many others, in the short term it seems likely that we'll see inflation in places where it's unwanted, such a retail prices, and deflation in asset prices and (possibly) wages. I wouldn't be surprised if rents fell, too. Taxes, of course, are a whole other story...

[babesagainstmachines]

good honest reply dazed&confused.

we seem to have slipped that 'hyper' word in though, when I used the 'high' word......big difference remember.

it doesn't look like deflation to me at the moment, lets see if something changes that, then we can continue this conversation.

edited - actually, that's not quite what I meant above (it doesn't look like deflation, I should have said the stats indicate death by deflation BUT other indicators say high inflation)

I think the link you are missing GoM is the delay between monetary/credit expansion and it's affect on prices. Current price inflation is a result of past increases in money supply. We will get an inflation overhang, possibly for several years, where essentials will be rising in price whilst the money supply stagnates/deflates. After that all prices will head downwards or stabilise. I believe that global "shortages" in food and commodities is largely spin, simply putting blame for price inflation on something other than the cheap and easy availability of money in the preceeding years.

Short term, the very best we can hope for is stagflation, with actual deflation a strong possibility. Either way asset prices will be hit.

[Guest tbatst2000]

Why not?

I wouldn't stick my neck out and say that low interest can't ever fix such a situation. It all depends on exactly how bad things are in reality, something which is very hard to judge except with hindsight. There's two recent examples to look at here. First is the Japanese bank bust triggered by the collapse in commercial real estate values. Second is the dotcom bust triggered by the collapse in tech stock prices. In the former, low interest rates (down to 0 for a while) didn't fix things, in the latter, they did (at least temporarily anyway). The question is, which of those is closer to what we face now? I'd say Japanese bank bust, since this time around it's the banks that are suffering the most - the M4 growth halt which triggered this thread provides evidence for that since it seems to show that growth bank lending, which is a very major component of M4, has ground to a halt. There could be many reasons for that of course, but the most likely one is clearly that they don't have the money to lend anymore (birds got to fly, banks got to lend etc).

[narco]

Anyone who thinks global commodity prices are tracking the UK's M4 money supply are seriously mistaken. Deflation will be in UK priced assets like housing only. All imported items will start the escalate in sterling price.

The pound will collapse with UK house prices.

Welcome to the poor house.

Correct.

Monetary inflation always preceeds price inflation. Monetary inflation over the last 7-10 has been absolutely astronomical whereas CPI and RPI is low/ modest.

Even with 2 or 3 years of negative money supply growth, the money supply that has been bottled up (in housing assets) is going to come crashing into the wider economy over the next few years.

The only deflation we will see is in housing and the exotic consumption associated with excess borrowing and housing MEW!!

[scott666]

I would put it like this (just a quick attempt to update the list from daedalus) -

Low rates -> Credit expansion (i.e. early 2000s)

Credit expansion -> High global demand

High global demand -> Commodity Inflation (start of INFLATION PHASE)

Commodity Inflation -> Essential Retail Product Inflation (STAGFLATION PHASE i.e. recently)

===Credit crunch ===

Rate Reduction -> Weak Pound -> Import Inflation (STAGFLATION PHASE)

M4 reduction -> Asset Price deflation (end of STAGFLATION PHASE)

Asset Price deflation -> Demand deflation (start of DEFLATION PHASE)

Demand deflation -> Essential product deflation (DEFLATION PHASE)

Essential product deflation -> Commodity price deflation (DEFLATION PHASE)

I don't think we are at the end of the stagflation phase yet, more like at the beginning. Remember much of our food/fuel/energy is imported and there is a global demand for these which will increase prices in these sectors. With sterling now weakening this process is just underway now, leading to higher imported inflation.

[HenryWeston]

well, in my case I neither have a large amount of savings or any debt. I'm just a poor academic

if you havent got anything, you havent got anything to lose

[FreeTrader]

I am openminded about all of this, so should you all be.

I'd like to think we're all pretty open-minded about it GOM, and from what I read here, most of us with savings have taken steps to cover ourselves against a wide range of outcomes. I'm sure no one disrespects your views.

We can all see the rising costs of basic staples and living costs, but for anyone who's not been caught up in the debt binge of the last decade, these rising costs will be more than offset by falls in asset prices and durable goods if current trends continue. When money gets tight and people are heavily in debt, fire sale prices are available on all manner of stuff, from secondhand cars to even houses.

I think when we talk loosely about 'deflation' here this is in general what we mean - not the strict monetary definition. Over the past few years we've all argued that we've been witness to a massive inflation, despite apparently benign CPI. Now we may well see a massive deflation despite apparently high CPI.

[Pluto]

Well yes, but I think there is probably going to be a global deflation problem.

Not while the BRICK nations are growing.

[Crash Buyer]

I don't think we are at the end of the stagflation phase yet, more like at the beginning. Remember much of our food/fuel/energy is imported and there is a global demand for these which will increase prices in these sectors. With sterling now weakening this process is just underway now, leading to higher imported inflation.

We are in a credit crunch, demand cannot keep growing without credit. You cannot assume that global demand will continue as normal when the west enters recession.

I think we are well into the stagflation phase - real inflation is already high. Import inflation will simply compound the stagflation phase.

Falling demand will lead to falling commodity prices.

[narco]

I think when we talk loosely about 'deflation' here this is in general what we mean - not the strict monetary definition. Over the past few years we've all argued that we've been witness to a massive inflation, despite apparently benign CPI. Now we may well see a massive deflation despite apparently high CPI.

The seeds have already been sowed for higher price inflation. Why do you think the US FED no longer publish M3?

Some estimates have this figure running at approx 20% annualised. Even if money growth is moderately negative next year, the previous excesses are going to spill over into the economy.

[Backseat Economist]

I would put it like this (just a quick attempt to update the list from daedalus) -

Low rates -> Credit expansion (i.e. early 2000s)

Credit expansion -> High global demand

High global demand -> Commodity Inflation (start of INFLATION PHASE)

Commodity Inflation -> Essential Retail Product Inflation (STAGFLATION PHASE i.e. recently)

===Credit crunch ===

Rate Reduction -> Weak Pound -> Import Inflation (STAGFLATION PHASE)

M4 reduction -> Asset Price deflation (end of STAGFLATION PHASE)

Asset Price deflation -> Demand deflation (start of DEFLATION PHASE)

Demand deflation -> Essential product deflation (DEFLATION PHASE)

Essential product deflation -> Commodity price deflation (DEFLATION PHASE)

So, we're somewhere between the second and third part of the stagflationary phase then.....even though we seem to be at the start of asset price deflation as well. Blimey!! So, we're looking at the start of full on deflation round the middle of next year then....by which time HP's should be just about y-o-y negative.

Going by my own experiences, it feels to me like bread and other essentials have gone up about 50% in the last three years or so - as I've argued all along we've been in the stagflation phase since the rate cut in 05, and have had a lot of the commodity and food increases passed on. The one thing to stop REAL stagflation, a la the 70's is wage increases to match, and this is not being allowed to happen, so this stag period is more like a baby stag - if that makes sense, as the cost of raw materials and food rises, but employment stays level or falling in real terms.

Once peoples' perception of value changes, we are then into the decreased demand phase, which in all effects, IS deflation. And, to do this, simply remove the credit and this immediately makes people think about how much their spending a lot, lot more. The goalposts change and suddenly everyone has to adjust to the new reality.

GT.

[Guest tbatst2000]

if you havent got anything, you havent got anything to lose

You are Bob Dylan and I claim my $5.

[Pluto]

We are in a credit crunch, demand cannot keep growing without credit. You cannot assume that global demand will continue as normal when the west enters recession.

I think we are well into the stagflation phase - real inflation is already high. Import inflation will simply compound the stagflation phase.

Falling demand will lead to falling commodity prices.

You argument revolves around the assumption that the west is the engine of growth in the world. I will argue that world growth has been transfered to the BRICK nations, so worldwide commodity prices will be driven from them no us. If your argument is correct then I would expect to see sterling strengthen on the M4 data and forecasts for deflation - infact the opposite has happened. As sterling collapses expect to see all commodity driven prices in UK sterling go through the roof. Recent examples are oil at near all time highs in sterling and the same with Gold.

The inflation/deflation argument is not as simple as you are all trying to make it sound. The UK and US will have severe deflation in items fueled by the credit crunch (housing and tat) and severe inflation (even hyperinflation) in all imported items.

Get ready to be poor - because that will be the result as there is no bail-out from wage increases.

[narco]

The inflation/deflation argument is not as simple as you are all trying to make it sound. The UK and US will have severe deflation in items fueled by the credit crunch (housing and tat) and severe inflation (even hyperinflation) in all imported items.

Get ready to be poor - because that will be the result as there is no bail-out from wage increases.

Absolutely spot on.

Who is going to be able to negotiage a 15% wage increase when RPI is only 4%? We are no longer a nation of union backed industrial workers.

The UK is in serious serious trouble imo with an economy almost entirely built upon a perpetual housing bubble and cheap debt.

[Wlad]

Not while the BRICK nations are growing.

Well part of the issue may be that if there is deflation then demand for BRIC goods (apart from oil and gas- i.e. only the R in BRIC) may slump. Given the bubble in the Chinese stockmarket, property, etc., then there could be a sudden slump in growth unless the IC part of BRIC can decouple itself and become focused inwards on Asia. Maybe it can, maybe it can't. We might be about to find out!

[Guest tbatst2000]

I think when we talk loosely about 'deflation' here this is in general what we mean - not the strict monetary definition. Over the past few years we've all argued that we've been witness to a massive inflation, despite apparently benign CPI. Now we may well see a massive deflation despite apparently high CPI.

Yes, this is spot on. If you take inflation to mean what most of us care about, which is 'the cost of maintaining a certain defined standard of living', we have seen massive inflation over the last 20 to 30 years. I earn much more more than my parents ever did, adjusted for published RPI figures, but it's hard to see how my standard of living is much better - I have a smaller house, work longer hours, travel further to work and so on. Conversely, during the last recession, my standard of living rose quite markedly: I kept my job and had no debts so was able to buy a place of my own to live (rather than sharing with friends) and expensive assets in general became very much cheaper (I got some amazingly nice second hand furniture for almost no money for example). I think FT is right when he says that, just because the narrow view of inflation is high, it's not necessarily the case that the overall package of what people can buy with their money is any less. It might be that you have to stop buying such nice food and can't afford to buy a plasma screen telly, but in exchange you may be able to afford more space for you kids to play in and a spare room for guests to come and visit. It all depends what you consider is the most important stuff in life I guess.

[crashmonitor]

Well, first let me define deflation as purely wage deflation. When we talk about inflation eroding debt, that's the only thing to focus on. That doesn't mean EVERYTHING goes down in price, but most things do. Price is more to do with production and demand than looking at M4 anyway.

However, as far as I'm concerned:

My council tax is actually going down this year by 3%.

My transport costs went down this year thanks to Oyster (my bike helped too).

My food bills have not risen significantly.

Electricity went down after changing provider.

Petrol is the only thing that has risen. So, no. Tat and essentials are falling in my own experience, which could well differ to yours.

Months of ploughing your lonely deflationary furrow and finally you are in the ascendance against the inflation brigade.As a paper Bear I hope you are right.Anecdotally,I can't see where all this inflation is.Yes public sector services cost more and petrol,but that's where it stops.Meanwhile in the real world ,all the private sector businesses I have communication with are slashing prices to maintain volume to capture the shrinking discressionary spend.Even winning businesses like Tesco( who have a 4% rise in input costs ) only dare pass on a 0.8% increase in output prices.My own drawings are down 10% YOY.Yep civil servants can bleat about their 2% pay settlements but if you want to sell UK holidays or restaurant meals you will go out of business unless you slash 10% off last year.

Edited December 20, 2007 by crashmonitor

[Pluto]

Well part of the issue may be that if there is deflation then demand for BRIC goods (apart from oil and gas- i.e. only the R in BRIC) may slump. Given the bubble in the Chinese stockmarket, property, etc., then there could be a sudden slump in growth unless the IC part of BRIC can decouple itself and become focused inwards on Asia. Maybe it can, maybe it can't. We might be about to find out!

The BRIC nations are growing fast and these nations are net savers. Demand locally will cushion the blow of the west going into recession/depression. We are a nation of debtors and our debts are being called in.

The UK / US is tapped out of credit, it has got so bad that our financial institutions are on the brink of collapse. You are seeing the economic balance shift from West to East. This all started about twenty years ago and no-one should be surprised.

[narco]

Well, first let me define deflation as purely wage deflation. When we talk about inflation eroding debt, that's the only thing to focus on. That doesn't mean EVERYTHING goes down in price, but most things do. Price is more to do with production and demand than looking at M4 anyway.

However, as far as I'm concerned:

My council tax is actually going down this year by 3%.

My transport costs went down this year thanks to Oyster (my bike helped too).

My food bills have not risen significantly.

Electricity went down after changing provider.

Petrol is the only thing that has risen. So, no. Tat and essentials are falling in my own experience, which could well differ to yours.

So in order to save or preserve your existing lifestyle, you've had to significantly modify it.

Food, Energy, Oil and all commodities have been rising at a spectacular rate. Oil is up at over 40% since the beginning of the year and has held firm at over $90!

There is absolutely no evidence of price deflation in these areas unfortunately.

[crashmonitor]

So in order to save or preserve your existing lifestyle, you've had to significantly modify it.

Food, Energy, Oil and all commodities have been rising at a spectacular rate. Oil is up at over 40% since the beginning of the year and has held firm at over $90!

There is absolutely no evidence of price deflation in these areas unfortunately.

So you spend all that much more on energy and oil and somehow you can also increase your discressionary spend on everything else on a 2% wage rise.Nope businesses are slashing the prices to compete for a shrinking pot of money.

Edited December 20, 2007 by crashmonitor

[thirdwave]

Well part of the issue may be that if there is deflation then demand for BRIC goods (apart from oil and gas- i.e. only the R in BRIC) may slump. Given the bubble in the Chinese stockmarket, property, etc., then there could be a sudden slump in growth unless the IC part of BRIC can decouple itself and become focused inwards on Asia. Maybe it can, maybe it can't. We might be about to find out!

Having just returned from a trip to India among other places, I can confidently state that it is already happening. The credit squeeze has led to a surge in capital inflows and the Govt there is seriously considering placing restrictions on foreign investment. I also read in the local papers that India is still expected to exceed the growth traget of 9% for 2007 as the growth is increasingly driven by domestic consumption rather than global factors ( I certainly saw a lot of evidence of it whilst there)