Monday, Oct 09, 2006

Let the Inflation & wage spiral begin

BBC: Pay rises 'to accelerate in 2007'

Suggestion that private sector pay will rise by 3 to 4.5%. Not if there is a squeeze on jobs.

Posted by holding out @ 08:59 AM (517 views)
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1. the bald man said...

Whats the prediction for interest rtaes?

Monday, October 9, 2006 09:14AM Report Comment

2. paul said...

Interest rates will stay as they are, and the government will play a "la la la I'm not listening" game.

Monday, October 9, 2006 09:17AM Report Comment

3. inbreda said...

Can't see wage inflation being allowed without interest rate rises - they'd have a hell of a time fiddling the figures that badly.

Monday, October 9, 2006 09:28AM Report Comment

4. Redwing said...

Gordon Brown is determined that public sector wage rises will be no higher than 2% over the next year. More and his budgeting gets really tricky. In August Mr Brown said he was right behind the BoE's rate rise. If the BoE weren't independent the Government would have pushed them into higher rates sooner imho.

Monday, October 9, 2006 09:35AM Report Comment

5. tyrellcorporation said...

I reckon the MPC will be soiling their underwear right now... should have raised rates last week but they bottled it...

House prices surging
Manufacturing on the up
Wage demands rising
Consumer spending bouyant
Heading into the party season...

Anyone fancy a punt on 0.5% hike when they see the next set of inflation stats...

Monday, October 9, 2006 10:11AM Report Comment

6. sovietuk said...

I wonder if the ammunition strapped troops in Afghanistan will get a bit more. Total disgrace that the troops had to smuggle out a video to family and friends to show how tough the fighting is (government disgracefully paints a rosy picture). Of course such unselfish actions and risk taking will fall on deaf ears in ruling circles. Money there is better spent on 'diversity outreach officers' and other 'more pressing social issues' rather than helping brave selfless people fight vicious hand to hand bloody battles thousands of miles away on a mountain top. Perhaps members of the cabinet would like to spend an aftrenoon there. Shame on you NL.

Monday, October 9, 2006 10:17AM Report Comment

7. Surfgatinho said...

Wage inflation scares the BOE (apparently) I imagine even they will want to nip this one in the bud. Failing that I'll be giving myself a 4% pay rise!

Monday, October 9, 2006 10:31AM Report Comment

8. The Capitalist said...

Well said SovietUK.

BoE are really the archtiects of their own dilemma because they are pumping liquidity at over 14% per annum. Printing money always ends in tears - ask the Germans in the 1930s...a number of sinister parallels with UK: debt, real poverty, social unrest and racism all kicking off. It will only take a political agitator to mobilise a disenfranchised and angry working class to take up arms. Step forward Nick Griffin. Am I being dramatic?

Monday, October 9, 2006 10:53AM Report Comment

9. Bfskinner said...

the Goverment is keen to keep public sector inflation uplifts arround 2%. even though this is supposed to balance out inflation and cost of living increases, as a public sector worker I find my self with less and less at the end of every month over the last two years (without any lifestyle changes). Despite such 'increases' i feel i have had a 2-3% cut in my pay in real terms over the last couple of years. The whole CPI seems to be a fiddle to keep wage demands down. Now with the MEW piggy bank slowing down and increases in private sector wages it will be interesting to see what happens to rates. Though I suspect the MPC will continue to fudge it. They messed up cutting rates last year, have waited to long to reverese it. Now the only hope of recovery is further rates rises (followed by a slow down, followed by pick up), but of course no one wants to do this. the fact is, the current ecconomic cycle is underpinned by credit. Our ecconomy is over valued and underpinned by over one trillion pounds of credit that doesnt exist and large parts of this money will never make it into the ecconomy as many lazy feckless people will skive off their responsibilities through IVA's rather than be thrown into the gutter where they belong!


Monday, October 9, 2006 11:47AM Report Comment

10. Geed said...

Tyrell; Your logic is superb, it is a shame it is lost on the BoE committee. If only the BoE had half the balls of the North Koreans to actually do their job but at present 0.5% hikes are a thing of the past. Now 0.5% reductions....

Monday, October 9, 2006 12:07PM Report Comment

11. paul said...

I don't think the MPC will be worried at all, tyrell.

Inflation is currently above target, but last week the MPC decided to do nothing about it. To me, that means that they've already let go of the reins, and are letting the inflation hobby-horse bolt.

Monday, October 9, 2006 12:33PM Report Comment

12. 2007 turnaround said...

Surely banks will feel the effect of high inflation if when they are paid back their money it's not worth what is should be...

Hopefully they would then start to call in their debts early and restrict all the lending

Monday, October 9, 2006 01:08PM Report Comment

13. geed said...

Tyrell - Sound logic indeed, shame the BoE appears to be practicing a different economic model. They appear to be ultra paranoid most probably realising that it all is hanging in the balance, aware that Blair and Brown will need no encouragement to point the finger elsewhere when/if it all goes pop.

Inflation is still above their target yet they appear petrified to follow a 0.25% rise with another to try and curtail the greedy publics penchant for cheap money. 0.5% rise, if only the BoE had a tenth of the balls North Korea has to do its job.

The interest rate rises, if they come, need to change the prospective house purchasers sentiment. Since last years strange 0.25% reduction, buyers believe the BoE will always protect property values and will be there to bail out a possible crash with offer of cheaper credit via lower IR's in the future. Can you blame them?

Monday, October 9, 2006 01:15PM Report Comment

14. Foobar said...

No doubt the ONS will suddenly realise they have calculated inflation all wrong and revise the inflation figures down; like last time.

Monday, October 9, 2006 01:28PM Report Comment

15. denzil said...

>>Anyone fancy a punt on 0.5% hike when they see the next set of inflation stats

0.25 a dead cert for Nov.

Monday, October 9, 2006 01:40PM Report Comment

16. tyrellcorporation said...

I think my post at the weekend was passed over, it's a good one though as it looks like tightening in the US might not be over.

With the ECB ratcheting up rates too, the BoE will have to follow suit. With the bonus season (for some) almost upon us, I reckon another IR rise in the New Year too - 5.25% by March...

Monday, October 9, 2006 01:53PM Report Comment

17. holding out said...

Tyrell - You must have got a good nights kip - I thought you on the verge of topping yourself the other day - Now you're confident about rate rises gatecrashing your House price bulls party.

Monday, October 9, 2006 02:05PM Report Comment

18. harold said...

The problem we have is that the temptation of all debt-heavy economies is to let inflation rip and erode the real value of the debt - basically, flood the market with cash to make every one feel flush. However, while in the short term this will give the appearance of economic stability, growth, and therefore increased positive sentiment, in time it will kill the economy and make the resulting recession much worse. We are I think - due to a number of political imperatives including mid-term US elections plus Brown's impending accession - right at that part of the curve. It makes (from our point of view) for depressing headlines. For example, HPI up 1.2% in August. So we ask - why? Are we producing more and exporting, getting richer and pouring money into property. No, of course not - we're just borrowing it to inflate the price further. Why is this inflated price a bubble - because it is NOT supported by sound economic fundaments of wealth creation. Okay, so the City is highly successful - but also highly susceptible to global economic slow-down. This is happening (e.g. US house prices), but we must be patient, and stick to the notion - based on sound principles - that the UK property market will be brought back to its log-term average, and that we have not entered a nonsensicle 'new paradigm'.

Monday, October 9, 2006 02:46PM Report Comment

19. Mda said...

I think all of the contributors to have made some excellent points, giving strong reasoning as to why the house prices should correct based on sound socio-economic and political reasoning.

My concern is the time scale the long tail of house prices has continued to grow over. Up until recently I was a strong advocate of a sharp correction; however my thoughts now turn to an equally slow and painful decline as the market buries its head in the sand with the same illogical determination that got us here in the first place

I suspect I will be approaching retirement before I can say I told you so by which time everyone has stopped listening

Monday, October 9, 2006 03:36PM Report Comment

20. Ticktock said...

I think you are right harold, they will certainly kick the 'crunch' into the long grass to stave off the long overdue collapse. I just wonder how long they will be able to continue the inflation fiddle once they do. As has been said many times before, the problem only gets worse with every phoney inflation of the bubble. They can run, but they can't hide forever.

Given that they already inflated the bubble to stave off total collapse post, would they dare do it again? - if they do, we are probably looking at a collapse that will dwarf the 30s (if we're not there already!)

Monday, October 9, 2006 04:38PM Report Comment

21. inbreda said...

Agreed Harold - which is why Gold (accepting recent fluctuations) seems a sensible place for money to avoid being eroded by rampant inflation.

Monday, October 9, 2006 04:52PM Report Comment

22. Rocket Robbie said...

Inbreda, can you tell me how i would go about investing money in gold? I sold my house this year hoping for hpc but as it dont look like it is going to happen i need to invest my money in somewhere other than rubbish saving accounts

Monday, October 9, 2006 06:01PM Report Comment

23. paolo88888 said...


Why will the gold you buy hold its value better than houses? You can live in a house, which will always be useful, but Gold just looks pretty. Though it may well turn out to be a wise investment, because gold has "always held its value in the past". But this sounds very much to me like "you cant go wrong with bricks and mortar". I'm not knocking it, but in a recession with a hungry family to feed, the last thing I want is a block of metal.

Tuesday, October 10, 2006 01:26AM Report Comment

24. Davo453 said...

Gold has historically been used as a hedge against hard times for the simple reason that it doesnt deteriorate, bung it under the bed bury it in a hill side or sink it in a ship it will still be intact when you reclaim it.

Sure you can live in a house, but thats not the point, if you have enough to keep the wolf from the door what do you do with all that extra cash, stuffing your mattress with it can be awfully uncomfortable. Houses need repairing and you have to pay rates etc

Gold may not however be the reliable hedge against all disasters that it once was. Times appear to have changed but than again.

Tuesday, October 10, 2006 05:05AM Report Comment

25. Blindleadtheblind said...

both are assets, however one is very overvalued and the other very undervalued, one is very illiquid and the other very liquid. Golds rise over recent years is no accident, it will also continue. A far safer refuse for your savings than bricks and mortar I would suggest.

Tuesday, October 10, 2006 07:31AM Report Comment

26. d'oh said...

Gold does fluctuate with respect to currencies and sometimes it is over-valued. Historically, when things go pear shaped a lot of money piles into gold as it is a commodity that cannot be inflated. Although there is a lot of noise, when inflation takes off, or there is fear with respect to economic stability the price of gold shoots up. e.g. the inflation of the late 70s and early 80s sent gold through the roof. Similarly it has been argued that the peak in gold price this year was due to fears of economic instability due to Iran etc. It is a long term investment, not a short term one as its relationship to currency is not so simple e.g. from 1980 till 2001 gold was on a more or less downwards path.

If the US/UK decide to inflate the currency then my understanding is that gold is likely to become heavily bought for the reasons mentioned above. If we enter deflation, then gold is not a good buy - cash under the mattress would be better. However Ben Bernanke has more or less indicated that the US will roll the printing presses if deflation looks to be on the horizon. Personally, I think this will just cause a commodities bubble.

By the way, I am not an investment professional and what I have said above should not be taken as investment advice; it is just my (limited) understanding of gold and its recent history. If you are interested in a good read btw, try the Power of Gold by Peter L Bernstein. It is a really ifascinating history of gold and its relationship to "money".

Tuesday, October 10, 2006 09:32AM Report Comment

27. Inbreda said...

"paolo88888 said...

Why will the gold you buy hold its value better than houses? You can live in a house, which will always be useful, but Gold just looks a recession with a hungry family to feed, the last thing I want is a block of metal."

Because if you have a ten pound note, you can either hold on to it or buy ten pounds worth of Gold. If inflation becomes a problem, then you will find that whereas ten pounds would have fed your family for a day, it will now not even provide a meal for one person. Sell the gold and you will find it will be worth, say 50 pounds - enough to feed your family for a day. That is why theoretically it is better to hold gold rather than money.

The problem with buying a house at the moment is that although they are useful, as you say, they are over priced - which means that if inflation does NOT take off, and assuming there is a maximum reasonable income multiple that houses can reach, then you will never be able to upgrade your house (i.e. move somewhere bigger) and you will have to work for the full term of the mortgage to repay it. If inflation DOES take off, you will have to suffer the pain of a big mortgage with high interest rates. If you can survive this then when the pain is over it will all have been worthwhile. If you do not survive this, the banks will hunt you done for the money even after repossessing and selling your house.

Either way, having a rainy day fund in the form of gold is very sensible.

And gold isn't just pretty - it has numerous uses, and is very difficult to increase the supply - all the 'easy to get' gold is gone.

Tuesday, October 10, 2006 10:59AM Report Comment

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