Monday, June 12, 2006

Gordon Brown acknowledges worldwide inflationary pressures

Oil price a risk to growth, warns Brown

Gordon Brown speaking this weekend at the G8 finance ministers meeting in Russia said, "There’s a recognition that the world economy has had three years in a row of some of the fastest overall growth since the 1970s. But inflationary pressures exist because of oil. Interest rates have been going up in most of the big areas. There are obviously some vulnerabilities as a result of political instability and we’ve got to be vigilant.”

Posted by denzil @ 01:43 PM (546 views)
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10 thoughts on “Gordon Brown acknowledges worldwide inflationary pressures

  • Here it is – the first one in a very long list to come of reasons why the miracle economy is failing.
    All of it will be not Gordons fault!

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  • When the economy is doing well….it is all down to one person…..Gordon.

    When the economy is doing badly…it is oil prices, inflation, SARS, BSE…and old friend from out of town caused it..er…there was an earth quake…er…Dr David Kelly did it……it wasn’t Gordon’s fault.

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  • Rate rises to combat inflation from rising oil prices is only a risk if your economic growth is dependent on cheap credit.

    Oh dear.

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  • “But inflationary pressures exist because of oil!” says Gordon Brown.

    Nothing to do with cheap money then?

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  • Retiredbanker says:

    Brown inherited a massively strong economy from the Tories and ever since has been squandering this advantage.
    Amazing that he has got away with it for so long, and how uncritical the media have been ( excepting Simon Carr in
    The Independent, and particularly Jeff. Randall in The Daily Telegraph who is forecasting a HPC ).
    Wealthy media types and “Hampstead” socialists seem to have an affinity with Blair & Co.- say the right thing and get
    rewarded with a title, even if you have been living abroad to avoid income tax, or have the estate of your late wife dealt
    with in the USA and save £60m inheritance tax ( I’ll leave you to fill in the names).

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  • I don’t get why you rise interest rates to control inflation. Can it cause it now?. After all if you raise rates, shops sell less so they have to make more on the items they do sell therefore increasing inflation

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  • Nails,

    Raising interest rates does two things:

    1) It raises the value of your currency on the international exchanges, which makes imports cheaper and limits price rises as a result.

    2) It moderates consumer spending, and if people spend less, shops cut prices to maintain their sales volumes.

    But it’s a rather blunt tool, and not a perfect solution. Economic strategy in China and Japan has made it work quite well for the last few years, but those strategies are now changing. I am convinced that we are not that far away from the forced abandonment of inflation targetting as an economic policy.

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  • bidin'matime says:

    Nails – the basic cause of inflation is too much money chasing too few goods. If I have £10 and you have £10 and we meet in the only shop around and find that it has £30 worth of groceries on the shelves, then there’s no chance that we shall have to pay over the odds.

    But if we both borrow £10 and now have £20 each (‘too much money’)and we meet in the same shop, the chances are that they will sell out and hear us both asking why there is not enough on the shelves. You would happily buy 2/3 of the stock, but I got there first.

    If they can’t get the stock (‘too few goods’) then they will be inclined to put the prices up. Then next time we come in with our £40 between us, the one of us who is prepared to pay a bit more, gets more of the goods. Shop-keeper squeezes a few more quid out of the same goods. Finding that he’s getting a better price, he offers more to get a bigger chunk of the manufacturer’s output and so the ‘factory gate’ price goes up. The extra profit they make finds it’s way back to the High St and the spiral keeps going upwards.

    ‘Economic growth’ is achieved when the increased money in the system promotes increased production and keeps prices down (avoiding ‘too few goods’), but when the money in the system grows faster than production, inflation is the result.

    So, as cheap interest encourages people to borrow more, this enables them to spend more in the shops, which pushes up prices in the shops. The theory is that increasing interest rates reduces the incentive to borrow (and spend) so the amount of money coming into the system slows down and avoids the effect described above.

    The snag (for the government) is that, as a result, the British economy is extremely sensitive to rate changes – people have been borrowing like there is no tomorrow, mainly against apparent property values and anticipated future rises in value. The money swills into the system one way or another, pushing up prices. Once people recognise that property prices will not rise forever (which a small increase in rates could bring about), they will stop borrowing and start looking at how they can start to pay off their mortgages – then the whole situation will go into reverse.

    These are the facts of economics that even Tony and Gordon can’t spin away.

    (PS – not trying to compete or take issue with Uncle Tom – this response started before seeing his contribution).

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  • Interesting all this. Does anyone think if the intrest rates had been kept at higher rate instead of what happen it would have been better for us in the long run?

    I can only just remember the last recession and people losing there homes. (mainly my school mates). Horrible think to happen whe nthere parents lose there home. Yet it looks like to me it could happen again

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  • People losing there home may be a horrible thing but they didn’t have to MEW!!! If someone bought their home more than 5 years ago the chances are their mortgage repayments would be minimal (< £400/month). You can cover that working in Tesco's!!! If they have MEWed and spent it on cars, holidays and other needless crap and then start crying when they are threatened with re-possession then tough. Should I be concerned?? Not in the slightest. It’s all part of the cycle. People are responsible for their own decisions and if they wish to gamble on their home then they accept the risk that they could loose it. Simple as. Hopefully it will be compunded for the BTL crowd and I hope it hurts cause when they are desperate to off-load, I won't be buying. When chasing a market down, why but now when in a few months time it will be worth x thousand pounds less?? Vendors dropped desperate buyers only to re-advertise at higher prices in the inflationary market of 2 years ago - now the tables will turn.

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