Osborne's inflationary problem

Hawkeye

I thought the letters went the other way? Controlling inflation is the BANK's job and King has to write to Osborne. Have things changed?

Sally Chatterjee

Handy, you exclude house prices on the way up and then include them on the way down.

The disastrous Brown might thankfully ejected from office but his ruinous legacy will last for many yeas to come.

Pete Hoskin

Hawkeye: yes, King sends the first letter, and then Osborne replies. That's what I meant by "exchange letters," but I probably wasn't clear enough.

Chris lancashire

What did anyone think was going to happen after creating and injecting £200bn into the system?

Ian Walker

In the great argument over CPI versus RPI, it occurs to me - why not have the BoE target BOTH to be at or around 2%?

To manipulate two measures, you need two levers of course, but since quantitative easing hasn't been quite as bad as we all feared, then turning on the printing presses would seem to me to be an adequate second tool.

No doubt the relationship between interest rates, money supply, RPI and CPI would be very challenging to work out. But that's what economists are good at.

Catesby

the inclusion of housing costs would certainly be a step in the right direction.

But if mortgage interest payments were part of the definition of inflation, then every time interest rates were put up (to respond to inflation), then inflation would go up further.... and so on in an endless spiral.

I'm no economist, but it defies common sense to me.

Could someone kindly explain?

Victor Southern

An obvious consequence of two factors - very low interest rates and quantitative easing.

A saver now makes a negative return on any secure investment.

Meanwhile the low interest rates do not result in loans to businesses. I looked at the bank statement of one of the companies that I help administer this morning. At the foot it offers 0.00% interest on credit balances up to £999 and also 0.00% on amounts over £999. Next to that I am informed that if we had an overdraft we would pay 12.19%, a useful margin for the banks.

GDT

Tony Blair and Gordon Brown's true legacy is yet to be revealed. I think a couple of years from now we will truely come to appreciate what an utter mess they made of things.

Ant

But let's also remember that, unlike the Euro countries cited wtih low inflation, we have helped maintain the competitiveness of our economy by devaluing the Pound significantly since the second half of 2008 and this was always going to be accompanied by sticky inflation. QE-scaremongering isn't the only - or key - issue here.

chris as usual

@ Catesby

Just what occurred to me - surely as interest rates came down with Brown's regime this would have reduced the inflation index if you include housing mortgage and rental costs.

Does he mean the cost of buying housing?

michael

Increasing interest rates will cause house price deflation, also potentially aggravated by increases in taxation. The net result, applied to the mix, will take the sting out of inflation stats.

Snowman

Hard to shake off the feeling that more's to come, not in the months close ahead, most likely from the late Autumn and further on. The banks are sitting tight on their massive chunk of the £200bn (more to come?) printed so far. As the Euro convulsion comes to an end, and our South European partners begin to balance their books, the money will begin to flow into the real economy. The inclusion of housing costs may dampen the index somewhat, nevertheless more money will be chasing fewer goods what with the stock levels kept low as growth slows down.

Osborne’s ‘welcoming of price stability’ sounds ominous. Higher inflation makes the repayment of his huge overdraft easier, and he a politician not a saint.

denis cooper

As CPI is in fact the EU's HICP by a less revealing name, a move back to an inflation target expressed in terms of RPI-X would be consistent with The Coalition's decision that there should be no more preparations for joining the euro.

Fatbloke on tour

QE will be 2012's problem.
Inflation is down to many things:

1) VAT increase to 17.5%, up 2.5%.
2) The power of Tesco, any ideas on their own internal rate of inflation?
Credit Crunch and their margin is not affected, strange that.
One for the OFT?
3) Remnants of the import inflation caused by the low pound?
4) Oil price increases.

Consequently cuts in real wages seems to be the order of the day.

We are not that far from the other countries mentioned whan all things are considered.

Anyone making a big story out of it is really just pandering the the upper middle class establiments dog boiling orthodoxy.

Shroud waving to frighten the plebs.
Bigger things to worry about, Sniffy firing up the chainsaw being the biggest of them.

Fatbloke on tour

PH

Could you provide more info on the RPI vs CPI vs House price inflation linkage.

From memory CPI is the more widespread measure internationally, that is why we made the change.

RPI target = 2.5%, includes interest rates / payments but not house prices explicitly.

CPI target = 2%, does not include interest rates / payments.

The better question would be --

When have asset price bubbles ever been spotted by the Treasury / BoE?
And if they have, was a solution found and implemented?

The Preston Park Panther

Presumably Boy George is anticipating a further plunge in house prices, to helpfully keep official (haha!)inflation fugures down. Then, when house prices start rising in 2030, they can be chucked out of the index again to keep another fiddling Chancellor happy.

Senor Frizby

I think it may have a lot to do with this simple equation:

UK = RIP

General Zod

That, Catesby, is why you have two figures, RPI and RPI-X (X = housing costs). You monitor both.

Sir Graphus

I think Byrne's little note was astonishingly naive, in extraordinarily poor taste, and gives the govt carte blanche to make any cuts it wants. It's the Labour govt's verdict on its time in power. It can and should be used against them for the next decade.

Think This

Glad that Osbourne is looking at House prices, but really we should move back to RPI. Also the cause of this inflation can be laid squarely at the feet of Quantitative Easing, or as it is more commendably called, printing money.

Hawkeye

@Catesby - you are partly correct. However mortgage interest rates do not constitute the WHOLE of the inflation figure so the effect on inflation, whilst measurable, is small

Then there are the secondary effects. If the mortgage goes up then spending by mortgage holders on other items goes down which supresses demand. If demand falls then retailers cut their prices to attempt to bolster their market share and this price fall puts a negative component into the inflation figures that offsets the positive component from the mortgage rise.

Messy, isn't it?

Gawain

Yesterday we started to hear about the scorpions Brown, Byrne and Balls had put under various stones. We had all forgotten that they'd also left doo doo on the doormat !! Labour really were disgraceful tenants.

Yosemite Sam

I wouldn't get too het up about the actual formulae. For technical reasons RPI will tend to show higher levels of price change than CPI. But housing components are included in RPI and not in CPI, they should be so included, and G Brown Esq was criticised at the time of the change for excluding them. The main problem is we have a problem! The Chancellor and his Chief Secretary need the BoE to get inflation under control but increasing interest rates at present could be dangerous for private sector investment. A tricky policy issue.

Yosemite Sam

@ Catesby
Mortage interest is already in RPI but not CPI. Your comment about a feed-back effect of the current index on future inflation via further price increases can happen - and not just for interest payments. This is essentially what happened in the 1970's. Then, it was stopped by a severe monetary policy which disrupted the feedback. Just now that seems harder to do.

larchmont

@Catesby A retail/consumer inflation index is meant to measure the "basket" of goods we consume for an "average" life, so it should include a housing component, which is a blend of teh cost to buy and the cost to rent. The real driver of housing costs over time will be the average price of a house which will be affected by average income (affordability) and monetary conditions (cost and availability of credit). Overall it is not a large enough component of an index to allow blatant manipulation of RPI. In a way it is less open to debate than e.g. whether the basket should be reflect quality/technology improvements (is a telly always a telly or should the fact that it is now a flat screen marvel mean it has actually fallen in price?)

TomTom

Must start eating more LCD TV sets since their price falls mask huge increases in food costs - at least in supermarkets like Morrisons and Asda which are playing catch-up with Tesco and Sainsbury. It is certainly a revelation to watch prices leap on familiar items....then again petrol is a cost driver

andrew

umm, he said house costs. these are different to house prices. he wants to add the disinflationary low mortgage costs into the pie to reduce the number.

PayDirt

Victor Southern : and that is how the banks are getting back into the black after all that red washing over them last year, by giving savers a nothing return but charging over the odds on loans. Bit like forcing the people with mortgages to repair their balance sheets while being useless to savers. Bad for bank's customers all round. Really is time tp rein in the buggers, oh wait HM Govt has a sizeable stake in those banks now and has little wish to help savers or mortgagees. The public are snookered either way.

Tim Carpenter LPUK

The lasting way to deal with this situation is to implement Free Banking. The removal of the monopoly will be a check on fiscal incontinence.

Remove the monopoly over money and remove the bar against other institutions issuing their own. The BoE still remains responsible for the Pound and should be chartered to maintain Sound Money, and it will need to seeing as it is held in comparison with any other currencies that come about. Some might be 100% reserve (if they can keep that up), others might be gold-backed (likewise).

The Pound will have to compete and if the govt starts playing fast and loose issuing too much debt or printing money, people will move away from it and so the Govt will be punished by the market.

Catesby

Thanks to General Zod, Chris as usual, Yosemite Sam, Hawkeye and larchmont for the Indices 101.

Is there any reason why there couldn't be a CPI-X?

Yosemite Sam

@catesby
I speak from memory, and apologies in advance if I am wrong, but I think ONS do have an adjustment that takes account of (some) housing components in CPI. This is not usually published because it is not compatible with Eurostat standards.

denis cooper

I expect there could be a CPI-X, but that isn't what the European Central Bank uses as its measure of inflation:

http://www.ecb.int/mopo/html/index.en.html

"Inflation refers to a general increase in consumer prices and is measured by an index which has been harmonised across all EU Member States: Harmonised Index of Consumer Prices (HICP). The HICP is the measure of inflation which the Governing Council uses to define and assess price stability in the euro area as a whole in quantitative terms."

http://www.ecb.europa.eu/mopo/intro/benefits/html/index.en.html

"The ECB’s Governing Council has defined price stability as "a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%. Price stability is to be maintained over the medium term".

Cf the CENTRAL target of CPI = 2.0% set by Brown when he moved from the previous central target of RPI-X = 2.5%.

Speech about that change by Mervyn King in January 2004, here:

http://www.bankofengland.co.uk/publications/speeches/2004/speech211.pdf

"From May 1997 the target was 2½% for RPIX inflation. But in December the Chancellor gave the Monetary Policy Committee a new target for inflation. It is 2% as measured by the Consumer Prices Index or CPI, formerly known as the Harmonised Index of Consumer Prices. What is this new inflation measure, and how will it affect monetary policy?"

If we're going to move away from the EU's standard measure then we might as well go back to the non-standard measure which seemed to work better for the UK, RPI-X, or alternatively devise a new measure altogether for the purposes of monetary policy.

Kennybhoy

Victor Southern,

Hello Again. I only discovered your reply regarding subjectivism/relativism back on "Why Labour is still within striking distance" earlier this evening, and have replied in turn. If you wish, we can continue this over on the wall?

Regards,

Kenny

greenlights

The economy grew by 0.5% in the last 3 months.

I really wish that some of the people droning on about levels of debt would do some research.

1. The whole world (except for Cameron and Osborne) accepted the need to inject huge sums of money into the economy. Had they not followed Brown's lead, the world would have been in an almighty economic mess.

2. Debt levels are not at a historical highpoint or anything like it - except in cash terms (which is meaningless). In fact, prior to the credit crunch they were really rather low.

3. Debt levels are at an lent or higher level in most of our economic counterparts. Indeed net debt as a proportion of GDP is lower in UK than in US and "fiscally prudent" Germany.

Of course there are some issues of debt that have to be tackled but strangling economic growth will make this harder not easier. You reduce growth, unemployment increases, government spending on benefits increases and tax revenues diminish. Killing growth increases the deficit, not reduce it. Cut excess borrowing when growth is secured.

I really do wish people would check their facts and stop being so gullible. People tend to think that they are far too intelligent to believe what the media tells them but some swallow it hook, line and sinker.

Don't believe me, check it out for yourself. Find out debt as proportion of GDP since say 1920 (historical comparison); compare debt as a proportion of GDP with other countries (international comparison). See what you find and then try to justify the hysteria. If you are not prepared to do this, just accept that you are prepared to tug your forelock, toe the media line and believe what you are told.

Herbert Pocket

@greenlights: As others have pointed out elsewhere, GDP is an, at best, flawed basis on which to make judgements about the manageability of public debt. I agree with some of what you say, but there is a happy medium between the half-/non-informed media hysteria about the debt and the apparently complacent attitude taken in its public statements by the previous government and its many sympathetic commentators. And there's altogether too much of this big hand/small map blether that 'Japan/Germany/China is in a worse situation than we are'. That might well be true but it has no bearing on whether our situation needs redressing.

My own view falls squarely into the half-informed camp, which is probably more dangerous than the non-informed. However, FWIW, if Brown Labour was embracing modern monetary theory and believed that traditional economic ideas about debt, revenue and expenditure do not apply to countries with the ability to print their way out of trouble, then they should have stated that belief clearly and unambiguously, said that the scale of the debt was not an issue, explained why, and allowed reality to pass judgement on those beliefs and the policy decisions that followed from them. They did not: they (eventually) said they would need to tackle the debt (also eventually). They did not act as though they believed this was the case, and we ended up with a chimera, of someone talking the austerity talk, but taking steps that looked a lot like a profligacy walk. They paid lip service to traditional ideas about income and expenditure, and failed to produce a credible plan to reduce the deficit or debt by a meaningful amount. (Nor did the Tories or LibDems, but that is the privilige of opposition...) So 'markets' were left to infer the likely courses of action by a future Labour government, and many appeared to assume that they did indeed just intend to carry on spending - including on wasteful projects/commitments! - and monetising the consequences. 'Extend and pretend' suited many people, of course. That doesn't make it right.

And I personally cannot see why anyone (not required to do so by regulation) would buy the debt of any government over a 10-year period, let alone 30 years, even if it were indexed for inflation.