Monday, November 12, 2007

Loud Resounding Klaxxon Sounds!!!

Jump in UK factory gate inflation

'Rising petrol, chemicals and food prices sent factory gate inflation soaring to a 12-year high in October. Output price annual inflation rose 3.8% last month, the highest rate since December 1995, according to the Office for National Statistics (ONS).'Kiss goodbye to the idea of rate cuts!

Posted by tyrellcorporation @ 08:51 AM (3587 views)
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39 thoughts on “Loud Resounding Klaxxon Sounds!!!

  • I had a horrible thought over the weekend. The graph on the homepage shows the peaks and troughs in house prices compared to a gently sloping red line. The ‘correct’ price. Many people using this site have sold their house and are waiting for a return to ‘normal’ – or even an undershoot of prices – like last time. What if the gentle slope is wrong? What if it should be an exponential curve? This would correlate with the exponential growth in the money supply which will be necessary at some point to keep the current fiat money system going. We can see the start of it already. Central banks are going to have to produce more and more ‘liquidity’ out of thin air to keep the system afloat – as with Northern Rock; and try to keep the merry go round going. The gentle slope we have been used to over the last century is likely the bottom of the exponential curve. We may well be starting up the vertical slope now. This is why the prices of gold and oil and commodities in general are increasing at such a rate. When money is devaluing at such a speed, you need to have ‘things’ to trade – not paper promises.

    Once growth in the money supply becomes near infinite, as with Germany a while back and Zimbabwe now, either it all collapses in on itself or a new currency will have to be introduced. The New Pound no doubt. With a picture of Our Leader on it smiling beatifically perhaps (yuk).

    But for a while before this happens, a loaf of bread will cost hundreds of pounds, we will be being paid many thousands of pounds/week and, most importantly, anyone with a mortgage at present will easily be able to pay it off with a couple of weeks wages.

    If this happens over a short period – several weeks if an exponential growth happens – no houses will change hands as the solicitors won’t have got their act into gear and in fact no-one will sell as they won’t want to swap it for any money as it would become worthless shortly afterwards. They would only swap one house for another. Prices would be meaningless. All the housing stock would be owned outright. People like me will be left with egg all over our face. Very expensive egg…

    Perhaps it all depends upon the speed of the growth in the money supply? If it is slow enough then prices of houses will start to fall before wages can increase, value will be taken out of the system and we may be proved right. If it happens very quickly, people will want to keep hold of tradeable commodities and not hold cash. Not everyone can hold gold. The largest value of tradable commodities in the country is real estate. In the 70s the money system was saved with very high interest rates – but the system was much simpler then. Recently the banking system has come up with multitudes of clever tricks which all have to be unwound somehow. It will be much harder to solve now.

    Someone tell me why I’m wrong – it’s too depressing for a Monday morning.

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  • Cornishman you are not wrong in my humble opinion, which is a bit depressing.
    When there is an asset bubble, you can return to normality in 2 ways: reduce the price of the assets (HPC) or reduce the value of the money (inflation). Since we live in a democracy of sorts, the gov will take the option with the least amount of pain for the greatest number of people. And that is likely to include a massive dollop of inflation.

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  • Who was it that said “change is the only constant”

    I think as a nation we have become complacent, with three successive generations living in relative security and wealth since the last War. Thats only 60 years… I wonder how many of these “60” year cycles have occured in the past Millenium?

    don’t detatch yourself from the possibility that this whole house of cards that we call western civilisation could crumble in an instant.

    you have been warned.

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  • Cyril et al, forgive my naivety – but surely if we have a massive increase in inflation we’ll be venturing towards a HPC anyway?

    It obvious that real wage inflation is not keeping up with cost of living inflation and that those that work are getting proportionally poorer year in, year out. Any increase in inflation is just going to hit people harder and with the vast majority already backed against a wall on mortgage and living repayments would that not lead to a massive increase in defaults and repo’s?

    Basically I think we’re shafted – it’s time for a change. The US/UK economies in particular have filled up on cheap credit and massive debt – an economic contraction is due.

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  • I see it this way. Property is priced, in the most part, according to affordability. If you don’t have buyers, if everybody is priced out, then prices will fall. Simple as that.

    Since inflation is going to eat a larger part of our cash for the near future, and with interest rates set to stay relatively high (compared to the last few years), and with property becoming a very unattractive investment (the opposite to the last 10 years), AND with banks being forced to take a much more cautious viewpoint to lending money for a good while yet, houseprices WILL dip well below that line, and in my opinion it will get there quite astoundingly quickly. There is a significant amount of +ve feedback in the system, ie once a direction is taken, most factors reinforce that direction. In my opinion, unless something ingenious to implement some -ve feedback in the system is done, prices will have to significantly overshoot the mean. (don’t forget the graph is inflation corrected). BTL may start jumping back in as prices drop, but only those who know exactly what they are doing. Definitely not every man and his dog as has been happening recently

    (Excuse the terms, I’m an engineer)

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  • tyrellcorporation says:

    The MPC would probably have had this data prior to the last rate decision. I see little evidence of price reductions in Exeter; in fact the feel-good factor is alive and well with most bars, restaurants and cafes heaving in the city centre on Saturday. I still believe inflation is a seething tide only being held back by many fingers in many holes in the dyke.

    Energy/oil is used everywhere and for everything and the ripple effect of the recent surge in oil prices had yet to hit general pricing – until now.

    I’m beginning to err on the side of the Stagflationistas on this site.

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  • @Cornishman

    The red line on the graph is an exponential curve, however the rate of growth is low enough to leave little impact. You’ll notice that in any exponential system, there is a period of comparatively low growth before things really start to take off. The closer the base of the exponential function is to 1, the slower the curve will grow. House price inflation is noted at 2.4% per annum, to calculate the correct price at any point on the line is 1.024 ^ (Number of years) * starting house price. 1.024 is simply a small enough number leading to relatively slow growth.

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  • The graph on the home page is of “real” house prices so inflation (determined by RPI) is accounted for.

    Also, the “gentle curve” red line is exponential (or at any rate geometrical). It shows compound growth of 2.8% per annum.

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  • Cornishman,

    The debts out there can never be repaid at todays prices. From what little I understand, there are two ways out of this. The choices are: reduce the value of the debt (inflation) or write the debt off (deflation).

    I THINK that if paper money is printed by the government to pay its own bills, ie no debt, you get inflation a la Zimbabwe. However, if money is created as DEBT by banks, when the debts are written off the money is destroyed and you get deflation, like Japan. As far as I get it, the banks win either way ;-P

    I am a fan of Mike “Mish” Shedlock’s blog (try google). He has lots on this kind of thing. Some bloggers compare the West today with Japan’s crisis 20 years ago. They are still deflating 20 years later.

    George,

    Damn right. When oil starts to become scarce, riots are just weeks away. Buy gold (but leave some for me!)

    Tim.

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  • I does worry me. Oil is at record highs. Oil is used to deliver the Oil to the factories, Oil is then used to make plastics, rubbers etc…. the rubbers, plastics etc are then used to produce anything from a a milk bottle to seal on your fridge door, Oil is then used to deliver the fridge or milk bottle to the store, Oil is then used by you the consumer to drive to the store to buy the milk bottle or fridge. Oil is used everywhere around us and we are heavily reliant on this natural resource. Oil price is obviously a key indicator of inflation.

    But the Fed have cut rates by 0.75% and there are talks of the BoE reducing rates here. We are all being lied to.

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  • hold on – the chart is REAL prices not nominal if you look at Nominal you will probably see the blow off you are looking for . Of course i for one have always cautioned whether or not this is “the” top. I think it is but to paraphrase Keynes, you will become insolvent before markets become rationale.

    Anyone with any sense can accept we have a bubble BUT we have had a bubble for years. Calling the end of the bubble is the tough nut to crack (obviously) thats why i am in awe of people that have sold to rent, its a very difficult thing to do. I do think it IS the top. As i have said before use Elliott to f/cast the top 1.618 X the difference between the two prior peaks. For more Elliott stuff look at Money Oracle and Eric [some french guy]. He has used Elliott to look at the US homesales / prices.

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  • “Factory Gate” Inflation jump.

    Do we still have factory gates in the UK?

    I thought they had been removed from their hinges and melted down into containers and put on the back of a ship only to return to these shores fully laden with poorly manufactured Chinese, copyright infringing, disposible rubbish.

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  • Cornish

    I think you are partially correct and what you are talking about is inflation, the same thing that made big mortgages more and more easy going in the 1970s, what i think the graph shows though is house prices Vs average earnings, that is way too high and in need of correction.

    Its really a question of price Vs Value

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  • nopensionnohouse says:

    So, to avoid inflation eating your savings is it worth opening a savings account in another currency? If so, what currency?

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  • If you factor out the 2.4% trend rise in house prices shown by the red line, effectively redrawing the graph with a horizontal trend line, I would think that it will show the historical peaks and troughs all being of roughly the same magnitude. This might give a clearer indication of whether prices have actually peaked. I’d be very interested to know where this 2.4% trend increase comes from anyway, since I suspect that it isn’t real, and is based more on consistent under-estimates of RPI inflation.

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  • The mistake every civilization makes it to think it is eternal – look at the Greeks, the Romans, for example. Every civilization will eventually come to an end, ususally as a result of its own arrogance, greed etc. I see no reason while the latest cycle in human history, which you might broadly define as modern capitalism/corporatism and start at the industrial revolution, should be any different. It is common sense that it is unsustainable and utter arrogance and ignorance to believe that it is not.
    If you’re laughing at this, i’m well aware of how (over)dramatic it sounds – I started thinking about this becuase the more I read about the financial system and recent events (mainly on this blog), the bigger the weaknesses in it seemed to me. Perhaps, like the estate agent who thinks local house prices are only affected by local factors, you’re not looking at a big enough picture.
    Think about how much of the world’s oil, steel etc has been used up in the last 50 years in comparison to the previous 50 and the rate at which the economies and demand of China and India (1/3 of the worlds population) are expanding. Do you really believe nothing will change in your lifetime?

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  • The money supply grows at 14% a year. For the UK 60%+ of our wealth is held in housing. Should the value of houses drop by 20% that cancels the increase in money supply (I didn’t work out those figures properly but anyway…). If further wealth/money disappears through bank mismanagements and bad loans whatever, the money supply goes down again.
    So surely this inflation is temporary before deflation comes into play. Gold is not going up relative to the money supply and I think people say gold is going up (which it is) but I think better to say that gold is undervalued and is in the process of a correction. There are gold spikes around this time in history but they collapse afterwards….. So maybe this is the spike.
    The banks haven’t said how much they have lost which is a rather key point. There are two momentums , one is a purely sentiment specific to the UK as opposed to Europe bubble in housing which basically is over, but while that was happening there is this other deflationary issue. Which is why the interest rates have been so incredibly low, because they were ludicrously low really. Rates went pretty close to zero in the UK, 2% whatever. At the moment everything is up in the air so what can anybody decide now? Nothing really. But what happens over 2008/9 seems to me that must be deflation. All of this talk about the US injecting liquidity or money gifts ignores the fact that actually giving money away is fraught with difficulty. Japan prints free cash for american bonds, america buys Japanese goods so great they managed to give free cash to Japanese people in manufacturinjg. But part of their problem is over-capacity in manufacturing so actually not great in the end.
    At the moment all of the people who sold houses got a bundle of cash they don’t need to work for, the are the inflation really, but should it transpire that they don’t really have that money, that their pension fund made a loss, that their shares made a loss, that it has gone, goodbye, farewell, etc, then the inflation must go as well.
    ?????????????????????

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  • Forget about the figures in the first line, I just realised they don’t make sense. There is an effect from that though.

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  • If the 2.4% is ‘real’ growth, ie inflation adjusted, then it implies that housing is taking a steadily greater share of our incomes. Of course, it depends on the inflation measure used, but the simple model of inflation is that everything goes up, so that living standards stay the same, just we earn more and pay more for what we buy. So for housing to be increasing ahead of inflation, something else is falling behind. Which is not surprising, as we get cheap imports now, so that many things are cheaper in £ terms than they were 10 years ago and some things cheaper than 1975 prices (I’m sure you can now buy an equivalent socket set cheaper than the one I bought in the mid 70’s – wish I’d kept the receipt now to prove it..).

    So any future change is more likely to push housing down in proportion, as the developing nations catch up and want to be paid sensible wages. The result will, as some above have indicated, be less money available for housing costs and a resulting fall in the amount that people can / wish to pay for houses.

    Okay, so inflation itself may result in the selling prices of houses not falling by so much, but the government has got to make all the right noises to tell the world that we are fighting inflation and the only tool they have in their toolbox for this is interest rates – raising them even a little more will slaughter the housing market.

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  • Flicking through the ‘Daily Express’ the other day (well, it’s better than reading it), I couldn’t help but notice the full page ad taken out by Dr Vernon Coleman, promoting his new ‘Oil Apocalypse’ book. I prefer to read Richard Heinberg and Matt Simmons myself (the former for incisive overview, the latter for having insider access to the oil industry and finance sectors) but find it telling that the subject is starting to make inroads into the consciousness of the self-servingmiddle-classes.

    Even if they don’t stump up the money for the book, the subliminal suggestion that all is not well in the world will have made its presence felt – and the sense of underlying insecurity (already accelerated by BTL woes and the Northern Rock fiasco) promoted. This, inevitably, to be magnified as world events (possibly a forthcoming Fuel Protest Blockade; or the long-threatened US military strike on Iran – and those just for starters) begin joining the dots into a clearer picture over the next few years.

    I see an imminent period of austerity and belt-tightening on the horizon; with big hits to the retail sector as people learn to make do with less in preparation for harsher economic realities. It says a lot for the zeitgeist, that even the Daily Express is running ads for doomer-lit.

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  • The Japanese example is the most instructive. In the 1980s economic boom people believed they would be earning more in the future, so they borrowed lots of money to spend on property. Their faith in the future of the economy was so strong that they happily increased their borrowing from e.g. 3x to 10x their salary (those are made-up figures; I don’t have the exact numbers but the idea is basically the same). However during the economic depression of the 1990s “Lost Decade”, people lost faith in the future of the economy and the security of their jobs. Despite (or perhaps because of) 0% interest rates, people’s expectations of the future were much lower. The Bank of Japan couldn’t persuade people to borrow money.

    If the UK follows a similar path then house prices will fall in relation to earnings, pure and simple.

    Printing money is a dangerous policy for the government to pursue. A house price crash would hurt relatively few people (those who have speculated in the last four years or so); but inflation would hurt pensioners and the hard-working hard-saving middle classes, i.e. the swing voters pandered to by all governments.

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  • “This would correlate with the exponential growth in the money supply which will be necessary at some point to keep the current fiat money system going.”

    cornishman, I’m happy to say that on this point you are, IMHO, wrong – exponential growth in the money supply destroys all fiat money systems. Therefore, in order to avoid total collapse, following exponential growth in the money supply (as we have had since 2000) there needs to be draconian contraction of the money supply, leading to depression and heavy deflation, i.e., HPC (where the “C” in “HPC” stands not for “crash”, but “catastrophe”).

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  • Harold. What will cause the draconian contraction of the money supply?

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  • planning4acrash says:

    The MPC will put interest rates to 15% if there’s any risk of hyperinflation. It’ll be just like 1992 all over again.

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  • Shipbuilder.
    I am inclined to agree. Who would have believed 50 years ago that man could actually affect world climate and deplete natural resources in such a drastic way. The capitalist model of perpetual growth/expansion/more of everything will umtimately lead to our downfall. When capitalism confronts ‘green’ I’m not convinced that corporate business will bow to the needs of the individual.

    Perhaps we are all doomed and HPI is of no real significance.

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  • The MPC tracks the CPI – which now has little relevance to inflation. I’d thought we were in for a repeat of the early 90s – but now I’m not so sure. The value of money is being eroded faster and faster and anyone with any cash needs to protect its value somehow. Buying a house with it might not be such a silly idea.

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  • You might enjoy the new film “A Crude Awakening” which discusses the coming peak oil crisis and its effects on the global economy. I don’t think there’s any specific mention of house prices, but you can draw your own conclusions. The film was released in the UK last Friday; find it at your local independent or art-house cinema.
    http://www.bbc.co.uk/films/2007/11/05/a_crude_awakening_the_oil_crash_2007_review.shtml

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  • I’m not so sure the Japanese example is so instructive relative to timing i believe the bubble got to the stage where mortgages were being written for unborn children and grandchildren!!! [ Nippon Housing Loan Company’s infamous 100-year mortgage, which was supposed to be paid off by the borrower’s grandchildren. ] We aint there …yet!

    from wikipedia:

    “Prices were highest in Tokyo’s Ginza district in 1989, with some fetching over US$1.5 million per square meter ($139,000 per square foot), and only slightly less in other areas of Tokyo. By 2004, prime “A” property in Tokyo’s financial districts were less than 1/100th of their peak, and Tokyo’s residential homes were 1/10th of their peak, but still managed to be listed as the most expensive real estate in the world. Some US$20 trillion (1999 dollars) was wiped out with the combined collapse of the real estate market and the Tokyo stock market.”

    Now THATS a bubble!!! Still that doesnt mean we arent already at the top of the bubble….its just im not sure that Japan as such is a worthy parrallel.

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  • “What will cause the draconian contraction of the money supply?”

    Coordinated effort by the world’s central banks, partly, but not entirely, through over-night rates. IR’s will have to go up dramatically in order to protect the elite’s money tree, which is the fiat system. Under no circumstances will central bankers allow anything approaching a gold standard to return, which is a natural consequence of fiat system failure.

    “There is no means of avoiding the final collapse of a boom brought about by credit expansion.” Ludwig von Mises

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  • “The MPC will put interest rates to 15% if there’s any risk of hyperinflation. It’ll be just like 1992 all over again.”

    planning4acrash, absolutely.

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  • The only surprise to me with this data is that it isn’t higher – this will come through as higher CPI in a month or two.

    The era of low inflation and interest rates has been paid for with a ‘jam today’ mentality – the era is coming to an end, and there’s a huge legacy to deal with.

    There’s no clever solution – no quick fix.

    High inflation and interest rates look very likely over the next few years

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  • Given that most of the western world seems to be affected by the bubble, what would be the result of the bubble bursting? Recession in most western economies? With a good proportion of those economies built on consumption, what happens when we stop buying? I don’t know about anyone else, but anything less than record year-on-year growth in the company I work for will lead to mass redundancy. With everyone in debt, who’s going to want to start spending again? I think I was probably referring mainly to the current money system in my earlier post – I can see within the next 5 years a big focus on our money system should a recession happen. Things are different this time in the sense that information is available over the internet that the average bloke couldn’t have dreamt of 10 years ago – I also expect a raft of ‘war on terror’ – justified laws to restrict internet access. Who knows? All I know is that none of it is sustainable and probably not within my lifetime.

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  • shipbuilder, NWO is a comin’.

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  • “Given that most of the western world seems to be affected by the bubble, what would be the result of the bubble bursting?”

    There are more than a few similarities between the 1920’s and the last decade in terms of sentiment – and a lot of differences otherwise..

    ..but another ‘great depression’ is more than a wild theory – it’s actually quite hard to plot a credible economic forward scenario that doesn’t involve a major multi-nation slump.

    We also need to ask a basic question – what would China like us to be doing? – they are executing the most calculated and peaceful global takeover of all time.

    …get used to saying Zhong Guo (pronounced JONG GWO) – that’s Chinese for ‘China’ – it may pay to be polite!

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  • @Harold,
    I read the stuff about Ludwig von Mises, very interesting, especially considering he isn’t watching the UK economy (because dead). Prescient even. What about if the economy shrinks even faster than disinflation/deflation, that would mean an inflationary collapse?
    I think consumer spending and investment are about to keel over. I work in IT and I have seen the market collapse before and it feels the same now, demand is falling apart from councils/public sector.
    Gulp. Well, the Christmas figures will be very revealing. None of this helps me buy my flat !

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  • If you have loads of pounds or dollars then convert them to a raft of other currencies. Swiss francs, Yen, Yuan.
    This is why I will never sell to rent. It is a risky option IMHO.
    For me the upside opportunity doesn’t match the downside risk,
    I prefer to hedge my bets by owning a smaller house than I can afford. That way, whatever happens I remain “in the middle”.
    If prices crash, I benefit by being able to move up the ladder for less money.
    If prices carry on rising exponentially (and wages don’t), I stay where I am. QED.

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  • planning4acrash says:

    Dunno about the masses, but I just got promoted this week!!

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  • I think we need to regain a sense of perspective here. Does anyone seriously think that the MPC or the Government for that matter will allow the entire fabric of UK society to be ripped apart just to save a single asset class. The GBP will not be allowed to go under, interest rates will be increased to counteract inflation.

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  • I don’t know what came over me yesterday. I can’t believe I thought that buying a house might protect the value of my savings. What a prat. Forgive me.

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