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munimula

Illustrated Weakness Of Boe Inflation Targetting

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These charts are taken from the May'06, May'07 and May'08 BoE inflation reports and show the projected CPI inflation which interest rates are then based on.

As you can see even one year ago, 3.8% wasn't even considered a possibility at this time, in fact they barely considered 3% inflation an outside possibility mid2008 so interest rates were lowered accordingly.

And now we are told based on the May'08 forecast, of course that inflation will fall back to 2% within 2yrs.

Does this illustration not demonstrate how little control the BoE has over inflation and what a dangerous game they are playing by not putting interest rates up now? Their forecasts, as illustrated by these projections are simply nothing more than joining two dots between the current inflation measure and the 2% target 2yrs out to allow them to do what they want with interest rates.

May'06

irmay06cpiprediction.JPG

May'07

irmay07cpiprediction.JPG

May'08

irmay08cpiprediction.JPG

post-852-1216122502_thumb.jpg

post-852-1216122525_thumb.jpg

post-852-1216122550_thumb.jpg

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Raising interest rates now would actually be highly irresponsible and cause the UK to go into a major recession.

Inflation at the moment is NOT being driven by excess UK demand, so lowering that demand by sucking money out of the economy will have no effect on inlfation which is being driven by food and oil prices.

If oil prices stabilise at around $150, then inflation will fall over the next year as the year-on-year comparrisons catch up with each other.

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Raising interest rates now would actually be highly irresponsible and cause the UK to go into a major recession.

Inflation at the moment is NOT being driven by excess UK demand, so lowering that demand by sucking money out of the economy will have no effect on inlfation which is being driven by food and oil prices.

I tend to agree, that there is more chance of inflation falling back but the point is that, as illustrated when the BoE doesn't even factor in 3% inflation as an outside chance just 12 months before it hits 3.8% then really there is no knowing where inflation is or could go.

The whole system of setting interest rates on a 2yr projection is a complete joke.

I disagree with you that the UK is having now effect on inflation, cheap money is still being made available via the BoE mortgage debt swaps and still relatively low interest rates and some of that money is no doubt chasing the latest commodity bubbles which are creating the higher inflation.

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Raising interest rates now would actually be highly irresponsible and cause the UK to go into a major recession.

Inflation at the moment is NOT being driven by excess UK demand, so lowering that demand by sucking money out of the economy will have no effect on inlfation which is being driven by food and oil prices.

If oil prices stabilise at around $150, then inflation will fall over the next year as the year-on-year comparrisons catch up with each other.

Your logic is flawed...The UK does not over capacity in the manufacturing base. The UK is now net importer of oil since 2007. An irreversible trend. The UK relys on imports from all over the world, look at the producer price index...

If the BOE start to cut rates, then Sterling will drop sharply, against all other currencies. So if sterling goes down then it will take more pound notes to buy a barrel of oil, it will take more pounds to buy copper, wheat, corn, aluminium, coffee, fruit and vegetable, utility bills will go up. The list is endless. If the UK lower interest rates the yields on sterling denominated bonds, gilts will rise and bond prices will drop. The reason being that the interest rate differentials between different countries will be more attractive than any return on sterling. Sterling will be sold in the foreign exchange market in exchange for the imported goods, like oil, which means sterling net outflows will surpass net inflows. This is inflationary, as it takes more sterling to buy these goods.This means things will get more expensive...

I cant see how this will be balanced in anyway in the capital account, as the financial services sector is a disaster. Also M+A activity over the last few years has been supportive for sterling, however, M+A activity has dropped off a cliff so this cannot be relied on to support sterling.

If IR go up, then sterling deposits and favourable interest rate differentials will keep sterling stable, and reduce the imported prices we pay.

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I tend to agree, that there is more chance of inflation falling back but the point is that, as illustrated when the BoE doesn't even factor in 3% inflation as an outside chance just 12 months before it hits 3.8% then really there is no knowing where inflation is or could go.

The whole system of setting interest rates on a 2yr projection is a complete joke.

I disagree with you that the UK is having now effect on inflation, cheap money is still being made available via the BoE mortgage debt swaps and still relatively low interest rates and some of that money is no doubt chasing the latest commodity bubbles which are creating the higher inflation.

It does look like a joke.

Another point that does need to be raised is that the other hidden point about keeping inflation targetting is that wage demands are kept low - if inflation causes wage demands to escalate then I do hope that the BoE raises otherwise we are heading down a path that will be close to impossible to retrace.

HAL

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If oil prices stabilise at around $150, then inflation will fall over the next year as the year-on-year comparrisons catch up with each other.

Dream on.

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If oil prices stabilise at around $150, then inflation will fall over the next year as the year-on-year comparrisons catch up with each other.

Dream on.

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Raising interest rates now would actually be highly irresponsible and cause the UK to go into a major recession.

Inflation at the moment is NOT being driven by excess UK demand, so lowering that demand by sucking money out of the economy will have no effect on inlfation which is being driven by food and oil prices.

If oil prices stabilise at around $150, then inflation will fall over the next year as the year-on-year comparrisons catch up with each other.

Do you agree that the MPCs projections don't actually hit 3.8%? This is munimula's point and I think it is a good one.

Edit to add: what the hell are we paying these people for?!

Edited by Disillusioned

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Guessonomics isn't a science, you could make the similar argument about why the credit crunch wasn't predicted. The problem is all the economic models are flawed but yet those in power still insist on using them.

This all comes back to negligence, they are peddling the lie to the public they know what they are doing when clearly they do not.

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If the BOE start to cut rates, then Sterling will drop sharply, against all other currencies. So if sterling goes down then it will take more pound notes to buy a barrel of oil, it will take more pounds to buy copper, wheat, corn, aluminium, coffee, fruit and vegetable, utility bills will go up. The list is endless. If the UK lower interest rates the yields on sterling denominated bonds, gilts will rise and bond prices will drop. The reason being that the interest rate differentials between different countries will be more attractive than any return on sterling. Sterling will be sold in the foreign exchange market in exchange for the imported goods, like oil, which means sterling net outflows will surpass net inflows. This is inflationary, as it takes more sterling to buy these goods.This means things will get more expensive...

Precisely. The global trend in interest rates from this point has to be up and the Bank of England will have to move with this trend if it to maintain the value of the currency.

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Guessonomics isn't a science, you could make the similar argument about why the credit crunch wasn't predicted. The problem is all the economic models are flawed but yet those in power still insist on using them.

This all comes back to negligence, they are peddling the lie to the public they know what they are doing when clearly they do not.

Lots of people predicted the credit crunch. It's inevitable that after years of malinvestment, the bills have to be paid some time.

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Why don't the BBC run a feature on these fan charts – it's hard evidence of just how bad inflation is being managed. :angry:

Try to remember that the BBC's target audience have difficulty counting higher than 5 without using fingers.

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Lots of people predicted the credit crunch. It's inevitable that after years of malinvestment, the bills have to be paid some time.

I'm not saying they didn't predict it what I'm saying is no one accurately predicted when it would start, hence the term guessonomics.

It's a bit like putting your money on the same horse and saying it will eventually win. Win it might but that's not prediction.

If it was a true science you would have predicted the exact point it would kick off. For example tell me what height we are at and I'll tell you at what point water will boil. That's a scientific prediction.

Simply saying at some point in the future at an unknown date the economy will collapse isn't a prediction it's about as good as reading your stars if they print enough at some point what they say will be relevant to you. It's not science it's a guess.

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These charts are taken from the May'06, May'07 and May'08 BoE inflation reports and show the projected CPI inflation which interest rates are then based on.

As you can see even one year ago, 3.8% wasn't even considered a possibility at this time, in fact they barely considered 3% inflation an outside possibility mid2008 so interest rates were lowered accordingly.

And now we are told based on the May'08 forecast, of course that inflation will fall back to 2% within 2yrs.

Does this illustration not demonstrate how little control the BoE has over inflation and what a dangerous game they are playing by not putting interest rates up now? Their forecasts, as illustrated by these projections are simply nothing more than joining two dots between the current inflation measure and the 2% target 2yrs out to allow them to do what they want with interest rates.

May'06

irmay06cpiprediction.JPG

May'07

irmay07cpiprediction.JPG

May'08

irmay08cpiprediction.JPG

Two factors, first off, much of the increase in CPI (the 10% in food for example) is down to falling sterling and cost of imports.

Secondly, as stated in the BIS report, the 2% CPI target grossly underestimated the effect of chinese imports causing prices of many items to actually fall. In my view, the proper target should have been -2% over the period. That error allowed interest rates to be 4% not 6%, and that, in turn, fueled the money supply and house price bubbles.

So simple, inserting a minus sign would have fixed it all. Hindsight eh? Always 20:20

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http://www.guardian.co.uk/business/2008/jul/15/inflation

The jump in inflation surprised economists, who had expected it to reach 3.6%, and warned that the cost of living will head sharply higher in the next few months - increasing the pressure on the Bank of England to raise interest rates. Bank governor Mervyn King has already cautioned that record oil prices are likely to push inflation above 4% .

"CPI inflation is heading for 5% plus late this year," said Michael Saunders at Citi. "The monetary policy committee is unlikely to cut near term with such high inflation even though the UK may be slipping into recession. If the economy was not so weak, [the MPC] would be hiking." George Buckley of Deutsche Bank warned that "a breach of 4% seems almost inevitable" and "questions will now be asked if 5% could be reached".

And Alan Clarke of BNP Paribas said that as inflation keeps scaling new peaks, "before too long we are going to be talking about inflation with a 6% handle".

Both food and transport inflation surged to the highest levels since 1997. The cost of food and soft drinks rose 9.5% from a year ago while transport prices were up by 7.3%. Meat prices, in particular beef, rose by more than last year. Fruit, bread and cereals, as well as milk, cheese and eggs, are also dearer. Soaring fuel prices pushed transport costs higher with the average price of petrol increasing by 5.3p a litre between May and June to reach 117.6p. Diesel prices rose by 7.1p a litre.

Even the core inflation measure, which excludes food, energy and tobacco, picked up to 1.6% from 1.5%.

I fully agree it's wrong for the sheeple to demand more money we should just accept our place and our food poverty. Maybe the kindly rich will send us all food parcels if we are really good.

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Try to remember that the BBC's target audience have difficulty counting higher than 5 without using fingers.

Even the BBC's target audience are visually literate.

The fan-charts illustrate perfectly how fecking useless the BOE are even to someone who can't count. :D

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  • 401 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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