Sunday, August 17, 2008

Quick, cut rates again! yes that’s the answer (again)

Economists warn inflation could fall below 1 per cent

"Although there is bad inflation news around, there isn't much [the Bank of England] can do - it is too late"

Posted by paul @ 11:30 AM (1535 views)
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11 thoughts on “Quick, cut rates again! yes that’s the answer (again)

  • Looks like in reality they are saying we are heading for Deflation on a worldwide basis. I dread to think what will happen with lower interest rates. I would hardly think there has been a ‘tightening of money supply, regarding the bail-outs and this is Inflationary in itself, however evrything else is defnitely seeing a tightening of money supply retarding growth.
    I guess we are in a big mess!

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  • Slump in oil prices?! Slump in oil prices?! If I hear than phrase one more time I am going to scream. Oil has quadrupled in price over a very short period of time, and doubled since last year at even at the current “slumped” price. If I hear the “fact” that oil has “slumped” in price one more time I am going to scream. Is everyone’s memories so short? My goldfish has a longer memory than that. I’m sick to death of picking up newspapers with this sort of tripe in it. Yes, we may be heading into deflation, but for the love of G*d, don’t try to convince me that oil has “slumped” in price in any meaningful sense.

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  • However …

    The US has been saying that deflation will come about for some time, and it hasn’t happened.

    Why not?

    Q. What is the simplest way to tackle deflation (at the expense of the value of the currency)?
    A. Print more moneeeeyyyy!

    So what the Bank of England will do is to simply increase the money supply again. This will send the pound even cheaper and send inflation back up again thus cancelling out any deflationary effects. You think they won’t do that? What do you think has made the dollar so cheap in the last year?

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  • I can’t see inflation dropping especially:

    Food prices for imported Fruit (& Meat etc). People need to pick it and transport it (not to mention all those government regulations).
    Car prices. German manufacturers have to buy the parts and higher parts prices haven’t pushed through yet.
    Power & Gas: – unless we find a “new” gas field near Birmingham.

    It’s great to know the oil price may drop another 10 dollars but if the pound goes down to $1.75, that’s most of the benefit cancelled out! A drop in the pound will make all our other imports dearer too.

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  • Long-dated Index-linked Treasury Gilts, for example those maturing in 2030 and 2035, have risen sharply during the last month.

    The market seems to be increasing its (RPI) inflationary expectations.

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  • I was a bit sceptical as well at first but think that we may be shooting the messenger here. Can anybody come up with a specific reason why Lombard Street Research have got their figures wrong? King recently said that he expects inflation (as officially measured) to fall.

    http://www.guardian.co.uk/business/2008/aug/13/inflation.interestrates

    So let’s imagine Lombard Street’s prediction is correct: in late 2009 or early 2010 the official inflation rate has fallen and political pressure for interest rate cuts is growing strongly as the election approaches. It all seems rather plausible to me. First Bull trap in spring 2010 anybody?

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  • Inflation will fall below 1% whenever New Labour decide to publish that figure.

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  • Inflation is the rate of increase of price of goods.

    Inflation this year is 5%+ and will fall to 1% according to this report. So in two years prices would have risen by following
    Start price : 100
    One year on: 105
    Two years on: 106.1

    With the 2% target inflation should be
    Start price: 100
    One year on: 102
    Two years on: 104.1

    So you will still be paying way over the odds for your food/fuel etc. Which will be beyond your income or any increase in the same.
    And that will make people fall off the financial cliff.

    Assumptions
    1) Only if you believe that inflation is 5% now.

    A good example for this would be the haulage industry. Yes the price of brent crude has come down from $147 to $115.
    But the business model works around $20-30 max. They will still go bust.
    You can apply the same argument for Air line industry as well.

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  • last_days_of_disco says:

    “Inflation is the rate of increase of price of goods.”

    Wrong.

    Inflation is an increase in the money supply. There is less and less money around. Hence money is becoming more valuable.

    Deflation is happening now. You will only notice the effect on prices later. People always get caught out by the dynamics of
    the system. Somethings are already deflating. The cost of houses, cars, electronic goods. Commodities will follow in due course.

    Only if you have money will you benefit from this. Get rid of debt, get rid of debt, get money.

    I seriously doubt even our corrupt governments will try to hyper-inflate their way out. They are trying for stagflation, but that can only go so far, they will hit the buffers soon and then they will be *powerless* to stop deflation. They will apologise for this, but there is nothing they can do the damage is already done.

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  • stillthinking says:

    Totally agree with last_days_of_disco. Things are cheaper. Observations may change depending on demographic. Rising food prices and fuel do not offset the falling prices of property, rents, cars and consumer goods. You save more than the increase. If your whole income is devoted to food then you are in big trouble irrespective of inflation or deflation.
    The government already played negative real interest rates but nobody is going to spend all their savings because of that. Dump the pound maybe, start spending no. People can’t pay their debts back. All this, and we still have a surge in unemployment on the way.

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  • Strictly spekaing, disco is right – inflation is an increase in the money supply relative to the supply of good.

    As my A-level economics teacher used to put it – “inflation is too much money chasing too few goods”. Incidentally though that definition does away with any notion that inflation is beyond the control of the Bank of England …

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