Hmm. Inflation?

So soon?

First, the Office for National Statistics announced that inflation, as measured by the Consumer Price Index, rose from 3pc to 3.2pc last month rather than falling as all economists expected……..A further surprise was that Retail Price Index inflation – the broader measure which includes the effect of mortgage rate cuts – did not fall into negative territory, instead dropping from 0.1pc to zero.

So, err (and remember that I not only don´t think much of macro economics I don´t get much of it either. Perhaps those two things might be related….) have we already done all the stimulating that we need to do then?

We don´t need to throw more money down the well to stop deflation?

19 comments on “Hmm. Inflation?

  1. Yes, especially if there is a lag time before the effects of recent interest rate cuts are felt. Time to hike up interest rates to cope with the high inflation we can expect in the near future?

  2. import prices init. unless the currency keeps falling, the inflationary effect of that is one-time.

  3. Luis wins. This is a one-off shock, and won’t keep us out of deflation.

    In any case, we need a few years of 10%-ish inflation to make the debt problem go away. Bring it on…

  4. John, you and Luis may be correct about the one-off shock. However, I disagree about the desirability of high inflation. It will not make the debt problem go away, it will just shift the problem from those guilty of causing the current mess to the innocent, and thus encourage people to make the same mistakes in the future.

    Perhaps all savings and loans should be index-linked, thus savers need not fear inflation and debtors need not fear deflation.

  5. LE

    ” . . unless the currency keeps falling . . .”

    Why shouldn’t the currency keep falling?

  6. it will just shift the problem from those guilty of causing the current mess to the innocent

    Suggesting that people who believed the relentless propaganda from government and business alike to Borrow Money And Invest In Property For Your Future And Your Children’s Future are ‘guilty’ is a bit harsh, I reckon.

  7. “Nominal: about as much as now + 10%”

    Nominal is, of course, the rate you actually pay. Being told that your “real” mortgage rate is no higher won’t cut much ice with someone who has to find the “nominal” cash every month.

    Just do some simple arithmetic and see what the effects on a household is when their mortgage rate goes from 4% to 14%. Their actual cash payments are going to nearly quadruple. In the US Q4 2008 the mean debt servicing ratio for mortgages was 16%. That’s the mean. There are plenty of households where that’s nearer to 30%. How do you meet mortgage payments that have jumped to more than 100% of household income? Even if the household secures a pay increase in line with inflation (which is a massive assumption in a depression), a 10% rise in household income isn’t enough to compensate for the massive rise in mortgage payments.

    Inflation is going to make things much worse. It’s already contributing to today’s failure of the gilt auction (who in their right mind will lend money to the Government for 40 years at a nominal 3%?).

    A gilt strike is going to bring the country down. We’ll be lucky if the IMF is able to bail us out (Daniel Hannan made this very point to Gordon Brown’s face yesterday in the European Parliament: Gordon merely smirked).

  8. Luckily, Daniel Hannan is a daft prick who can safely be ignored (see: his lunatic comments on Iceland).

    & note that 93% of the gilts were sold *even though* they were only 3% nominal yield…

  9. Oh, and “Nominal is, of course, the rate you actually pay. Being told that your “real” mortgage rate is no higher won’t cut much ice with someone who has to find the “nominal” cash every month.” is gibberish.

    Either people will be getting 10%+ pay rises, or real GDP will fall by 10%+. If real GDP is falling by 10%+, then debtors are fucked whether inflation is 10% or 0%. If it isn’t, then they’re fine whether inflation is 10% or 0%.

    The simple truth is that below hyperinflation levels, inflation has no significant impact on households.

  10. “Either people will be getting 10%+ pay rises”

    Please explain how an increase of 10% in the salary offsets the cost of a debt servicing ratio that goes from 16% to 56% when the interest rates rise?

    Let us use some simple numbers to illustrate this, shall we? Assume a $50k post-tax salary, and mortgage payments of $8k (16% debt service ratio, assume a 4% mortgage rate). After inflation kicks in, salary will rise to $55k. Mortgage rate will go to 14%, mortgage payments will go from $8k to $28k. Household is worse off by $23k.

    Yes, the outstanding loan may be 10% smaller in real terms. That doesn’t help with finding the cash to meet the interest bill, any more than rises in house prices provide income (despite the Daily Mail stories of yesteryear telling us we were “earning” £500/day from house prices rising).

    “The simple truth is that below hyperinflation levels, inflation has no significant impact on households.”

    Is paying out $23k a year more in interest a “significant impact” or not? I’d say it was.

  11. Kay Tie, that’s a interest-only mortgage (of $2.5m) which obviously skews the figures in favour of a low inflation/low interest rate combination.

    (not that you don’t have an overall point, the question really is whether interest rates would rise fully to compensate the inflationary aspect I’d say)

  12. Whoops sorry, of $125,000 (not $2.5m!)

    My point being with a repayment mortgage your payments would rise to something like $18k from $8k, not $28k.

  13. ‘After inflation kicks in, salary will rise to $55k. Mortgage rate will go to 14%, mortgage payments will go from $8k to $28k.’
    Most mortgages (in the USA) are fixed-rate. The payments remain the same. Inflation helps the debtor.

  14. The CPI is not a very good guide to the rate of inflation/deflation (chiefly because it doesn’t include assets).

    The Telegraph’s ‘Real Cost of Living Index’ (RCLI) provides a more accurate picture:

    But the RCLI overall shows that the cost of living has fallen by 4.3pc since this time last year. The difference is explained by the other constituents of the index, household bills and transport costs, which fell by 8pc and 11pc on average over the same period.

    The overall fall in household bills also masked wide variations, however. All the bills included in the index except mortgage and internet costs rose, but they were outweighed by the dramatic 14pc fall in average mortgage repayments as the Bank of England slashed the official cost of borrowing.

    http://www.telegraph.co.uk/finance/personalfinance/consumertips/5048554/Deflation-Not-if-youre-buying-food.html

    Deflation it is.

  15. “Suggesting that people who believed the relentless propaganda from government and business alike to Borrow Money And Invest In Property For Your Future And Your Children’s Future are ‘guilty’ is a bit harsh, I reckon.”

    And those people who didn’t believe said propaganda and were prudent with their earnings by put some away? You know? Those who saved? Are they guilty? Should they be punished for the actions of those who got themselves into debt, even if we regard them as innocent victims of predatory businesses?

  16. The simple truth is that below hyperinflation levels, inflation has no significant impact on households.

    In an environment with 10% inflation, someone who is bringing home £1000 per month in January, is only bringing home $910 in December.

    OK so next month he gets a rise, but imagine how difficult it is to live with falling income, especially if that income is low.

    Inflation is a tax on the poor.

  17. Charles, you can almost hear the nashing of teeth in the Telegraph office when they had to print that story showing the index they had devised to show a soaring cost of living, instead showing a plummeting one!

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