Inflationary troubles ahead of Osborne's Budget

Fatbloke on tour

Trevor: aka "Fraser" -- The fastest spinner in the Nelson family even although my brother is a DJ.

When are you going to get real on this subject?

The reason we have higher inflation in this country is that you cannot spot the obvious. Sniffy has been piling on the taxes and he is the reason for the UK inflation premium.

Do some work on CPI-Y and RPI-Y and it should all become clear.

Finally another question you do not seem to be able to answer:

To overcome this inflation spike, getting your retaliation in first as they say bolting the stable door before the horse has bolted, what would you have done?

Given the 18-24 month delay in higher interest rates turning into lower inflation we are talking about action in 2009.

What level of interest rates should we have been running in the first half of 2009 and what difference would this have made to today's inflation rate?

Finally compare and contrast what you were saying then and what you are saying now.

Please stick to commado comic military porn, your commenst on economics and inflation are laughable.

All that MOD spent on your education and what did we get?

Britain's second most poshest journalist bumping his gums on stuff he doesn't understand.

Tom Pride

“Allister Heath's City AM column today lists a few ways that inflation is quite handy for Chancellors. Inflation is not casualty-free” – and not cost free either. You don’t get aught for naught. Never have, never will. Payback will be a bitch.

Same old thing - take the easy option rather than the hard path of sound money and sound finance.

We are going to get the why we shouldn’t, why we should arguments about raising interest rates again, but, as far as I am concerned Mervyn (364) King has failed and failed badly. He should be fired.

alexsandr

the BOE rate is irrelevant. Banks lend and borrow at rates they make up and have no regatd to base
unless it is an excuse to raise rates for borrowers.
The issue with lending is the massive spreads the banks have between lending and borrowing
we need an alternative to the banks for lending and borrowing.
Stuff like angels den and zopa.
and we need to cut a swathe through red tape, both from the EU and UK stuff.
Stuff like combining corporation tax returns and companies house returns.
removing regulations should cut costs and so lower inflation

Ian Walker

Inflation: transferring wealth from the lifelong advantaged baby boomers to the debt-crushed children of Thatcher.

Long overdue.

Sean Haffey

>Ian Walker

As far as I am aware, Carol and Mark Thatcher aren't debt crushed.

Fiona

"The Lib Dem policy of raising the personal allowance will help..."

Yeah, right. Half a million people on low wages will pay £250 a year less in tax – but a damn sight more for their food, clothing, utilities and everything else. Meanwhile, about 700,000 more who earn around £42,000 will fall into the 40% tax bracket and pay more tax.

Also, combining tax with national insurance will mean that pensioners who pay tax but not NI will suddenly be treated to a massive tax hike, as well as coping with rising prices on their fixed incomes.

The only help from the Lib Dems that matters is propping up the Tories. The rest is inconsequential fluff.

Simon Stephenson.

Fraser

If you take the published figures for the UK's International Investment Position * for the last 5 years, it seems to be clear that as a country we are not spending more than our means:-

Net Liabilities, in £billions

2005 Q4 253
2006 Q1 312
Q2 327
Q3 353
Q4 386
2007 Q1 310
Q2 330
Q3 325
Q4 323
2008 Q1 327
Q2 326
Q3 257
Q4 101
2009 Q1 65
Q2 214
Q3 267
Q4 294
2010 Q1 168
Q2 166
Q3 185

A problem that we do have is that there is massive net over-saving in the private sector, despite the fact that the "feckless" and the "profligate" are, according to all reports, continuing to party at full-swing. The solution to our problems lies not so much in persuading the masses to save more, but in persuading the savers to accumulate less. Low interest rates and inflation are really the only effective way of doing this. The way things were structured pre-crunch served to encourage the wrong group of people to spend, and the wrong group to save.

* http://www.statistics.gov.uk/STATBASE/tsdataset.asp?vlnk=1550&More=Y

Hugo Chav

Ian Walker,

Inflation hits the poorest the hardest. The rich will hedge in gold, etc. The middle will be squeezed hard and half the middle class will become working class over the next ten years.

The BoE created the property ponzi, to prop it up we've got QE & ZIRP. What a legacy.

Verityred

No Fatbloke, your sad, shameless and slavish Labour trolling is what's 'laughable'. Have a look in the mirror, take a deep breath, and go and do something useful with your life. Being a drone for any political party to the extent you are pretty dumb.

GDT

what we are seeing is the effect of 13years of economic mismanagement by a discredited Labour Party. They've left the Country between a rock and a hard place. To raise interest rates now would be like jumping from the frying pan into the fire.

Perry

'As we have long argued . . . inflation is out of control in Britain — and Mervyn King doesn't even seem alarmed about it'

Agreed, - but as I have long argued, - and worried, - can Merve be sure thet HIS pension pot / package / payments are secure and inflation proof?

Life is SO hard for such as he and others like him.

Cjamesk

I'm ok I took the advice given by a certain Alex Jones, you now the so called "whack" who's banned from the UK around 3 years ago when he had a guest on who predicted the crash and other events politically (of which I can see happening now)

I'm laughing all the way to my lovely Gold and Silver investments of which he advised buying about 3 years ago.

Although the truth seems "far out" sometimes it's worth listening, iTunes Oct 21st Podcast have a listen then and look what's happening now for something more recent.

Now how's the nations Gold reserves doing............

justathought

So millions of borrowers with a 4% mortgage rate are after adjustment for inflation are enjoying a real interest rate of -1-1.5%.

With a coalition comes compromise on the the austerity measures and meanwhile the high inflation also lowers the cost of servicing the national debt. Everyone knows we have devalued the currency and and are now using inflation as a tool until the recovery takes hold.

The trend to hold cash reserves is even greater in the private sector as £500 billion of commercial bonds are due in 2012. Companies are not confident enough to invest those savings while the recovery is anemic.

I think we can pencil in QE3 from Bernanke and gold will then rapidly head towards $2000 oz

Percy

Jeez when are we going to get rid of Mervyn King and the necrotic grip of the baby boomers on us. They caused the mess, they sure aren't the people to sort it out.

Tom Pride

Simon Stephenson.
March 22nd, 2011 12:42pm

“The solution to our problems lies not so much in persuading the masses to save more, but in persuading the savers to accumulate less. Low interest rates and inflation are really the only effective way of doing this. The way things were structured pre-crunch served to encourage the wrong group of people to spend, and the wrong group to save.”

But surely there is a conundrum here. There might be a disincentive to save by lower interest rates (and inflation) but these will cause lower real investment returns as savings are built up and lower annuity rates and purchasing power when the savings are cashed in, which, must increase the portion of income which has to be saved to achieve a reasonable pension / income in old age.

Thus the conscientious (life’s worriers) are forced to save more and the feckless and the profligate carry on regardless.

Should you therefore raise interest rates and increase returns so the conscientious worry a bit less, save a bit less and spend a bit more?

justathought

@ Percy

Many would argue that for 13 years Labour operated a de facto 'homes-for-supporters' social housing policy. Labour councils working hand-in-glove with developers built a million social housing units. This cost was then passed onto the private purchasers. They then 'encouraged' the banks to allow self certification to allow borrowers to lie about their income otherwise they could not afford these inflated house prices. Call it robbing Peter to pay Paul.

The self certification has now stopped and those millions who used it to purchase their property are locked in as they would not now qualify under the more stringent affordability checks. This has prevented a flood of sellers and stabilized the fall in house prices. There are 700,000 empty homes and still the developers and Labour are clamoring for more very social housing.

I think you will find that the baby boomers were not the sub-prime borrowers that caused this crisis and if anything are sitting on their savings having repaid their mortgages.

yank

The Spectator chavs are still whining about "inflation", reminding us of this discrete "problem", which somebody else is "responsible" for, and certainly not their sainted coalition. Such a nice, neat bit of spin here... a longterm campaign of it, too.

But the proper term for what is occurring in the UK right now is "stagflation". It would have occurred under a Labor government, and it is occurring with the Camerloons, since their policy is basically a carbon copy of Labor's (most of us call a 1% budget differential a rounding error, although the Spectator and associated Torybots see it otherwise, it appears).

So stagflation is hung around the Cameroons' neck, and rightly so, because they have done nothing to address it, only exacerbated it.

Stagflation is the anvil upon which the Camerloons will ultimately be smashed. And now, Dave has provided the hammer to smash them... in Libya.

9-10 months... and they're already committing suicide? Pretty stunning how quick this all happens these days.

TomTom

Considering UBS is facing criminal prosecution in the USA for manipulating LIBOR in the period when banks would not lend to one another, t does look as if the financial system itself has caused most of our problems. Lloyds TSB just raiseed CC rates from 19.45% to 23.45% clearing anticipating accelerating inflation.

I know now to apply a DCF rate of 23.45%+ to any investments or purchases

Sir Everard Digby

FatBloke,

I am intrigued. What are your remuneration terms? By the word? By the vowel?

The only discernable inflation recently is in the content of your posts.

What they lack in worth they make up for in volume.

I am reminded of the quote 'Good things, when short, are twice as good'

Sir Everard Digby

Mr Yank,

You seem to be operating on the premise that political parties here have vastly different agendas; that would be nice in a world where choice in politics existed. The whole miserable collection offer us no alternative beyond a pretence. Stagflation is indeed nasty, as it was in the 70s. Like most of the electorate,I don't care who caused it but I do care if no-one fixes it.

Looks like no-one is going to.

As expected.

chris strange

Labour spent the last year of their reign paying for the bloated public sector with freshly printed money. That money is starting to trickle into the general economy, and as always happens when a government fires up the printing presses, is leading to higher inflation. Labour printed a lot of money so there is a lot more inflation to come until the amount of value in the economy and the amount of money in the economy come back into ballance.

Baron

be patient, wait till the RPI touches the double digit numbers.

denis cooper

Fraser, you write:

"In my view, the apparatus used to control monetary policy has proved itself unfit for purpose and I have very little confidence in the situation being resolved by the MPC under its current remit, membership and chairmanship".

Which is fair enough, and to some extent I would agree, but once again I would point out to you that the blame for this failure can't be loaded entirely onto Mervyn King.

King didn't draft the Bank of England Act 1998 creating the present apparatus for controlling monetary policy.

Nor does King set the remit for the MPC - under the Act it's the Chancellor who does that.

So it wasn't King who decided to pander to the EU by switching from an RPI-X inflation target to one expressed in terms of the EU's CPI.

And it wasn't King, but Osborne, who wrote this weak February 15th Open Letter in reply to the latest Open Letter from King:

http://www.hm-treasury.gov.uk/d/chx_letter_150211.pdf

If Osborne shared your concern about inflation then he could have said so, rather than saying in effect

"OK, inflation is way above target, but I accept your analysis of the reasons and so carry on as you are".

The fact that Osborne didn't reply urging King and the MPC to look again at their models and get a grip suggests to me that Osborne is not unhappy to see high inflation, while allowing commentators to scapegoat King for it.

Tom Pride

denis cooper
March 22nd, 2011 4:12pm

Denis

Your points are valid but was not the whole point of the MPC that it would be independent of politicians with their tendency to set monetary policy according to the electoral cycle and the opinion polls?

An independent Bank of England to impose strict monetary discipline like the Bundesbank of old – that was the promise and King’s job is to deliver. If King had what it took he could by force of personality drive the committee to deliver the target irrespective of what Osborne wants, and, if he cannot, he should say so and resign.

Whether it is the system or King, something is not working, which is Fraser’s point. No surprise as the last of the Balls/Brown big ideas bites the dust.

TomTom

"An independent Bank of England to impose strict monetary discipline like the Bundesbank of old –"

Cannot be done. Germany has a different banking structure and uses Monetary Base Control which ironically is only evident now in Britain that the banks do not lend.

Once the Corset was abolished and SSDs it was hard to constrain the monetary base in the UK and interest rates simply increased the profits for lending not demand, especially if demand was inelastic through being distressed borrowing or speculative against rising inflation.

Germany has not had an LBO-craze nor takeovers of German blue-chips like RBS funding Kraft to buy Cadbury, nor a private equity frenzy - Britain lives for such things. There is no way The City is to be constrained by tight controls on lending, othewise property portfolios would collapse and banks too.

Anyone recall Barclays going to the wall over commercial property in one of the previous busts ? Or Midland insolvent in 1973 ? It is a typical British credit cycle and NO, you cannot say let's be German because the economic structure in Britain is geared to financial speculation

daniel maris

The value of people's disposal income is falling and falling and that's what people notice. It's not just RPI at 5.5%. Inflation for those without large disposable incomes is definitely higher than that - most people don't benefit from cheaper Bentley's and transatlantic flights. Public sector workers are in teh middel of a two year pay freeze, even though is over twice what government claimed it would be.

This is an untenable state of affairs.

Johnathan Pearce

The problem is even more fundamental than the problem of the BoE having one or other inflation target, although Fraser is right to address this. The problem is that our whole banking system, including even the more private parts of this mixed economy system is based on fractional reserves. Bank credit can be pyramided many times over on the underlying amounts of cash deposits: this is one of the causes of boom-bust cycles.

In truth, if you have a strong, competitive economy and a stable base of money, there should actually be deflation, as the purchasing power of money rises as people can buy more goods and services with the money they have. The fact is, however, that apart from the temporary impact of cheap consumer goods from Asia, many of the things we pay for have risen in price. Even before the credit crunch, the price of things like professional services, education and private medical care was rising. There are various reasons for this.

We need an honest banking system, a complete revamp of how monetary policy is conducted and a sharp retrenchment to the role of the State. None of these things are on the agenda in the short term.

Tom Pride

TomTom
March 22nd, 2011 5:21pm
&
Johnathan Pearce
March 22nd, 2011 5:49pm

informative posts. Bit depressing really as it seems we are going to go through the seventies all over again. Looking out for the first signs of wide lapels, fat ties, brown check, side-burns and long hair.

Simon Stephenson.

Tom Pride : 1.47pm

Well of course you would conclude what you do when you start from the value judgement that savers are conscientious, and borrowers are feckless and profligate. This ethos dates back to the age when incomes were much lower and there was inadequate saving to fund the building of national infrastructure. In those days, the flipside of saving for most people was real hardship, and the resource-allocation problem for the country was how to find enough people to build infrastructure, when so many were needed to produce the necessary consumables of everyday life.

But we are no longer in this situation. The resource-allocation problem has been turned on its head, and the key problem now is how to stop people squirrelling away quite such large chunks of their income - because we have a shortage of consumption demand, not a surfeit of it.

Baron

Tom Tom, sir, then explain why it worked here, in the US before the philosophy of spreading wealth by sharing it imposed by the left leaning loonies, no boom no bust insanity were brought in, ha?

The German banks had nearly as much crap on their books as ours, also, what’s a strict monetary policy? People borrow if they believe there’s an opportunity that will yield more than the servicing costs of the loan, it matters FA whether it’s for a buy-out or a new toothbrush plant, that’s capitalism, you know.

David Farrer

Johnathan Pearce is correct. We need to reconstitute the monetary system on a sound Austrian School basis.

In a few weeks I'll be able to vote in the Scottish election. The Tory candidate is a good friend but I won't vote Conservative while their inflationary policies are destroying my life savings. My friend will get my vote if he resigns from the Tories and runs as an independent.

Tom Pride

Simon Stephenson.
March 22nd, 2011 6:44pm

The resource-allocation problem might have been turned on its head but another problem now looms large for most of us. With life expectancies approaching 80 and the expense of end of life nursing care – how are individuals to fund these without saving during their working lives? With current low annuity rates, reflecting the low interest rate, a substantial sum has to be saved to provide even a modest pension.

Are you advocating no savings and throwing yourself on the State at retirement age or just working until one drops?

At the risk of incurring your wrath – your first post was below your normal high standard.

bullopill

How much of this inflation is caused by hidden taxes such as levies on energy which go to subsidise ineffective windmills?

Simon Stephenson.

Tom Pride : 12.49am

You'll never incur my wrath by drawing to my attention where I have been mistaken in fact or false in logic. I'm trying to learn and to move the argument forward, so if I am working on incorrect suppositions, or drawing false conclusions, I welcome being told.

The point of my contribution to this thread is to question the mainstream assumption that the public-sector deficit represents profligate spending on the part of the nation as a whole. As far as I can see from the information available, this is not the case. The International Investment Position, which, as I understand it, is our net financial balance with the rest of the world, has not worsened over the last 5 years - in fact it has improved. So the public-sector deficit has not been required to be funded from overseas, and must therefore have been balanced by an equivalently gargantuan surplus in the private-sector. So all this guff about needing to tighten our belts is just nonsense - what needs to happen is that the public-sector deficit and the private-sector surplus both need to be reduced to a more reasonable level. And with one but not the other, the economy cannot function.

So somewhere in amongst the zillions of words addressing the need to reduce the public-sector deficit I'd like to see the occasional article that mentions that achievement of this will actually be catastrophic unless it is accompanied by an equivalent reduction in the private-sector surplus. And this means exposing the fact that there is no economic sense for increasing prosperity to be welcomed by individuals squirrelling away large financial reserves to cover every possible negative contingency in the future. We must develop proper and attractive social insurance schemes so that people are discouraged from going down the DIY route.

I appreciate that Quantitative Easing has in effect provided some of the funding for the public deficit, but I don't see this as to reverse or invalidate the arguments set out above. Even if we add the £200bn QE to the IIP, we are still no more net-indebted now than we were 5 years ago.

Cynic

Ian Walker, what a bitter, envious person you appear to be!

Tom Pride

Simon

I prefer not to get drawn into long discussions on this blog but your measured and thoughtful response deserves a reply (even if this is now a private conversation).

I do not believe that you can reasonably draw the conclusion (the UK government deficit is internally funded by UK private sector savings) that you do from the data set you show - Balance of Payments - International investment position.

I have a number of issues with that first post:

1. You did not explain why you believe the figures you show justify the conclusion you draw or what the numbers actually mean.

2. You did not explain that the numbers are estimates and are derived from a wholes series of constituent estimates of the various components of national assets and liabilities. These really are “estimates” with I suspect a significant +/- variation.

3. The numbers you quote are derived from the difference between two enormous estimated numbers:

For 2010 Q2 £9,573,257,000000 - £9,739,218,000,000 = £(165,961,000,000)

For 2010 Q3 £9,907,655,000,000 - £10,092,834,000,000 = £(185,179,000,000)

My instinctive feeling is that the figures you show, the net of national assets and liabilities, cannot be statistically significant relative to the +/- variations in the two gross figures. You than draw a conclusion from the quarterly movements between these statistically questionable net figures:

I.E. £(185,179,000,000) - £(165,961,000,000) = £(19,218,000,000) . . . . which is 0.19% of the 2010 Q3 total liability number.

4. Assets and liabilities belong in the balance sheet. The movement in these balance sheet numbers over a period does not derive solely from the movement in the national trade surplus/deficit (the profit and loss account equivalent) over the period. By far the greater part in the movement will come from changes in the values of the assets and liabilities – due to changes in specific asset values such as property values, share values etc and the impact of foreign exchange movements on the sterling equivalent of those values.

In drawing the conclusion that you do from the movement in net assets / liabilities values, you are mixing up apples and pears.

To illustrate (and simplify) – ,using your logic, you imply that if you spend more in a year than you earn, then you do not have to fund the difference externally (I.E. from the bank) provided the value of your house has increased by more than the deficiency in your income over your costs..

5. As I pointed out in my post above I do not believe that low interest rates will necessarily of themselves reduce savings and might well actually force an increase in savings. Incidentally low interest rates have not stopped the Japanese from saving. (Apparently the huge Japanese government deficits have been internally funded but then the Japanese run significant trade surpluses unlike the UK).

Anyway for the reasons above I found your post unconvincing.

Regards.

Simon Stephenson.

Tom Pride : 4.17pm

Thanks for your reply.

I'm just a guy on his own with no resources but who believes that 99.99% of what appears in the media is constructed by selecting whatever facts and statistics fit in with the theory that has been chosen as the one to pump, whereas I think we will only make progress by constructing theories that fit the totality of the facts and statistics - and that what the media does is arse about face.

I am a qualified accountant with an economics degree, so I do start from a base of some understanding of numbers and figures.

I've been impressed by the sectoral balance arguments given by, amongst others, Martin Wolf. It seems to me to be quite logical that if a public-sector deficit is not being financed by overseas borrowing or money-printing, then it must be being financed by private sector surpluses. I've made the reservation about QE, and I can see no evidence in the IIP of sustained additional overseas borrowing, so I'm of a mind to conclude that the information I have available suggests that the public deficit is a mirror image of a private surplus - as Dizzy and Martin Wolf also conclude.

http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2011/01/labour-the-deficit.html

http://www.ft.com/cms/s/0/ce298b22-1b63-11df-838f-00144feab49a.html#axzz1HRdgQ4mT

Certainly the IIP numbers are estimates, and equally certainly they are derived from huge balances on both the asset and liability sides. But if you are correct to question the accuracy of the IIP balance, there would surely be the massive quarterly fluctuations that come with excessive guesstimation? There isn't much evidence of these fluctuations.

I take your point about changes in asset valuation, but, again, I come back to the fact that apart from the 2 quarters immediately following the 2008 crisis, every quarter for 5 years has been within the range £166bn - £386bn, and that if the cash effect was really being swamped by the asset revaluation effect, we've surely have seen much bigger fluctuations than these.

I think the point you make about Japan rather illustrates the case I am making, that we, like Japan, will be forced into escalating public-sector debt until such time as private-sector demand grows to match private-sector supply.

You and I can bat this around until the cows come home - and make little progress. What I hope, however, is that perhaps an institution with research resources might be tempted to investigate whether or not the thrust of mainstream understanding is broadly correct. Maybe the BBC, or even the Spectator, perhaps?

Tom Pride

Simon

I am not going to bat it around any further but as this is a private chat I will let on that I wonder if the capitalist system / free markets might have an inherent draw back – that at the average point in the cycle it cannot deliver full or near full employment. There is the constant drive to higher productivity, which gives greater wealth but less employment, negating the creation of new jobs in new areas. Insufficient demand, excess savings and the impact of labour arbitrage to China (I don’t regard it as trade as they don’t buy goods off us but simply lend us the cash to purchase the goods) all play a part, but, these might just be a given function of the system.

If this is the case then there are always going to be unemployed unless the State runs large deficits, as during wars.

It is not a perfect system but it is the best we have got. How one gets round the drawbacks without creating distortions and damaging the efficiency of wealth creation – I don’t know. I advocate that free markets must operate together with a strong moral ethos so I don’t suggest war and I don’t see exporting the problem as a fair solution.

Over and out on this thread!

Simon Stephenson.

Tom Pride : 9.52am

Yes, thanks again.

I think you're right that the wealth-creation process is dysfunctional at both the free enterprise end, and the state control end, of the organisational spectrum. And yet mainstream thinking seems to be that our allegiances are strictly limited to one end or the other, and that the purpose of politics is a simple one-on-one contest to determine which route we should follow.

What happens to the handful of us who believe, human nature being what it is, that some best-outcome answers are to be found at the free end, whilst others are to be found at the control/regulation end?

Look forward to resuming our discussion at a later date.