Wednesday, Dec 13, 2006

Threat of rate rise in New Year escalates

TimesOnline: Rate rise threat grows as inflation surges to 10-year high

The threat of another rise in interest rates in the new year escalated yesterday after inflation figures were much worse than expected, htting a ten year high

Posted by denzil @ 10:56 AM (492 views)
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11 Comments

1. monty said...

"However, many economists also noted that the present acceleration in inflation was little different from what the Bank had forecast in its November Inflation Report."

I know but sadly a headline like that won't sell many newspapers and on this forum the glasses are only ever half-empty.

Wednesday, December 13, 2006 11:40AM Report Comment
 

2. paul said...

Come on monty, admit it, the BofE messed up bad.

It paves the way for a perfect storm scenario, at the wrong end of the winter season when fuel will be in high demand in the US and EU, and towards the new year of wage negotiations.

If the bank's fears are not realized and they do get through this untarnished they will have been very lucky indeed.

Wednesday, December 13, 2006 12:23PM Report Comment
 

3. monty said...

So long as the BoE keep CPI between 1% and 3%, which is what their brief is, then I fail to see how they have messed up. I'm sure they shared your concern when it leapt from 2.4% to 2.7% last month and shall be keeping a beady eye on this month's figure. If it ever exceeds 3% then I shall join you in querying their competence as will Gordie, believe it or not.

As I've suggested before, perhaps a more reasonable target would have been to keep RPI within a particular range. I believe it was Gordie's decision to use CPI, the rationale being that it would bring us more in line with the Euro economy. As much as it galls me to praise them, the best thing this government has done for the country was to give the BoE the independence it requires and make the setting of interest rates a non-political decision.

Wednesday, December 13, 2006 01:24PM Report Comment
 

4. tyrellcorporation said...

It's hardly a non-political decision when Gordon hires them! Rather like the BBC you don't get a job unless you are left wing.

Wednesday, December 13, 2006 01:48PM Report Comment
 

5. inflation is eating my savings said...

Central banks are never totally independent of the state, whatever the spin. It is structurally impossible. They may vaguely oscillate in terms of immunity from political tinkering, but they are an organ of the state, and function as such. However, they do not necessarily wish to preside over or be responsible for a crash- strong actions, at any stage, are regarded by people involved in any market as bad, and nobody wants that tag around their neck. In early 1929, the Fed made some tentative steps to halt the boom. After the public outcry to their meddling, they got out of the way. Interestingly, in 1929, people were borrowing to speculate at 12-15% (although the Fed rate was lower). The situations are different now, but I think that us waiting for another incremental rise is pissing in the wind. As a barometer, I don't really feel much public outcry from the public about the costs of their mortgage.

Wednesday, December 13, 2006 01:56PM Report Comment
 

6. paul said...

Again monty, your understanding of the issues needs tightening.

The brief has been to keep inflation at around 2%. Above 3% and they must "write a letter" to Gordon explaining why. But if this did happen, no one would lose their job and there would be no public inquiry. In other words, it's just pompous and symbolic formality. I wonder if there's a special archaic ritual than accompanies this scenario? It wouldn't surprise me if men in tights knocking on the door of Number 11 with a specially crafted walnut staff were involved.

As well you might say that the move to exclude certain goods in the form of the CPI has been the BofE's saviour (I'll come back to that). With RPI currently at 3.9% I'd wholeheartedly agree!

The move towards CPI may well also be the BofE's undoing. A government can choose anything they want to target inflation. The cost of bailing twine, the price of a bigmac or even the wax and wane of weather cycles are valid, if illogical target indicators.

The key decider of whether they've chosen the correct indicator is whether consumers and markets follow it as a useful measure of the devaluation of the currency. Now, how well do you think they're doing currently, on a scale of good - bad - very bad - to awful - why are these people still in a job? Remember the GBP has been losing valkue along with USD recently. This has only been disguised by the more rapid decline of the USD, creating a much larger difference between currencies. Losing value against others nonetheless.

In the city the inflation measures are regarded as the Real Price Index and the Contrived Price Index respectively. Says it all really.

And one more thing. The independence of the MPC is also a topic of debate - if their track record of impartiality was that good, the city would have received the exiting chancellor's pre-budget speech (singing his own praises) much better. They didn't, because they realize that all Gordon was doing was spending money he never had, and heavily taxing a stretched population on the basis of an engineered asset boom.

So Gordon's rationale had far less to do with ECB policies (evidenced by the fact that he's never given a toss otherwise about ECB decisions) and much more to do with a calculated and controlled inflation of assets to reap record tax gains.

BTW, to the people who think that IHT or stamp duty will ever be abolished/reduced - think again. That was the whole reason for shifting to the CPI to exclude mortgage repayments and erm, "adjusting" the basket of goods included. Did you notice that in moving to the CPI, they also reduced the weighting of other notoriously inflationary goods too? Now you know the real reason why.

Wednesday, December 13, 2006 02:06PM Report Comment
 

7. waitingfor hpc said...

too true - i have had 30% increase in corrugated, another 12% in Jan. Timber up 35% another 25% in Jan. Steel up 70%. Copper up 900%. Need i go on...............

For my business we now just cost goods on delivery..... not order.

But this bears no relation to the CPI or RPI. Yet think where wood & steel & other metals are used. Goods I purchase from China up 20% so far this year ..... so WHERE IS THE 2.7% COMING FROM?

Just given all my staff 3% pay rise .. they are all waiting at the door saying this does not cover inflation and are wondering where all their money is going!

Wednesday, December 13, 2006 03:26PM Report Comment
 

8. monty said...

I stand by exactly what I said. The setting of interest rates is now a non-political decision. The BoE may all be leftie, pinko, tie-died t-shirt and sandal wearing communists from the LSE appointed by a Labour chancellor but that does not mean their decisions are made along party political lines. One cannot say the same for the "good ol' days" when the decision was left up to the Chancellor. Hands up as to who wants to go back there? Anyone, anyone? I say, let's drop the rate before the election and then raise it again afterwards. Gosh, doesn't that just lend itself to stability?

Paul, the are some good arguments for choosing CPI over RPI and dropping or reducing the weighting of certain components. One of these is where a single component starts to override all the others and your index just becomes synonymous with that component, be that HPI, debt repayments or the price of copper. It all depends on what you, or the Chancellor, considers more important. The cost of debt repayments or the price of a new car doesn't mean diddly to my personal inflation rate.

Sure the City knows and loves RPI, as it probably should, given that one of the components happens to be debt repayments. You'll find that it is the City, in whom you place so much store, that has been financing this boom. Just where do you think all that cheap money comes from? Borrowing Yen at 0% has been simply wonderful and now Bernanke's dollars are making their way here in leaps and bounds as the Asians look for anything other than US Treasuries in which to place their trust.

"GBP has been losing value along with USD" Not sure where you've been buying your currency but you're being ripped off. The pound has spent the last six months strong against both the Swiss Franc and Euro, where it still remains.

To say that Gordie chose CPI in order to engineer the asset boom so that he could tax it is really, really stretching it. Yes, the Treasury has benifited enormously from the stamp duty and IHT and I'm sure they'd like to continue doing so. The Treasury has just as much to lose from a bust. Fewer sales equate to less stamp duty. Lower prices means less IHT. Not forgetting that voters tend to dispatch governments shortly after busts, as pointed out in a recent article posted here.

My point is that all this hostility towards the BoE is quite misplaced. Fire the government. They're the B'Stards who are taxing you to penury. I certainly didn't vote them in. Twice! To misquote my all time favourite cartoonist, Giles - "if the government gets up your nose, picket!"

Wednesday, December 13, 2006 04:37PM Report Comment
 

9. Ticktock said...

waiting,

I have heard many very similar concerns. Niether RPI nor CPI figures bare any resemblence to reality at all.

Once the BOE is mandated to control CPI based on stats, whoever controls the stats controls all. There is little the BOE could do even if it wanted to under the current system.
That is why BOE 'independance' is both a fraud, and a mistake. Removing the 'politics' from economics, also removes meaningful democracy from a Nation as its socio-economic model of production is thus un-changeable via the ballot box.

Wednesday, December 13, 2006 04:41PM Report Comment
 

10. paul said...

Well not quite, monty.

I take your point about not returning to the bad old days of electioneering, but the reasons I've indicated here are not half of it. The contrivance comes from other areas too.

Government statisticians now use a controversial practice - known as hedonics - for adjusting the real price of goods according to the increased usefulness and pleasure the product gives to the user. This goes some way to explaining why the price of PCs has fallen by over 90% since 1996. For the sake of illustration, imagine that in 1996 a state-of-the-art PC cost 500. Today a PC with ten times the power and capability also costs 500, but this shows up in the consumer price index as a FALL in the price of computers!

To repeat - you cannot buy a brand new vintage 1996 PC for 50 today. Instead, you have to spend the same amount of cash as before for a PC with more bells and whistles that you might need. But the impact of technological improvement shows up in the CPI as a dramatic drop in price - and that in turn cuts into the headline rate of 2.7%.

The Bank of England's targeted rate of inflation also under estimates changes in the cost of living because it doesn't make sufficient allowance for changes in housing costs. In particular, council tax is excluded from the CPI measure. This item has risen on average by over 5.6% a year over the last 18 years compared with an average increase in the retail price index of 3.7% over the same period.

This is the BoE's doing, not the government.

And you clearly underestimate the jump in revenue the treasury has gained - the number of homes worth more than the IHT threshold of 275,000 has risen by 72 per cent in the past five years, according to Halifax.

Wednesday, December 13, 2006 06:03PM Report Comment
 

11. Nohpc said...

The problem with the RPI is it will go up every time interest rates go up. The reason for this is every time interest rates go up so do mortgage rates and this is the main driver of RPI. BTW I don't think everyone is going to get a 3.9% pay rise for the next year which everybody seems so worried about. Bosses don't just say oh sure the RPI is 3.9% so here you go.

Wednesday, December 13, 2006 07:30PM Report Comment
 

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