Using the interest rate to control inflation might have been a useful tool if there was any evidence that it worked. The slight problem with that is that there is no such evidence.
Every economist everywhere and everywhen is wrong except me, The Spud.
We used to have quiet corners of walled gardens for folk like that, then came care in the community.
“care in the community”: but not by the barmaids of Downham Market, eh?
What odds can I get on Prime Minister Truss and President-Elect Trump by the end of next year?
An off-the-wall garden might be better suited.
This is even better:
The trouble is that this has not worked. Inflation is not falling as their theory said it must. There are three reasons.
First, inflation was not of the sort central bankers imagined. Inflation caused by external factors was never going to respond to domestic policy measures.
So if inflation is caused by external factors is there anything that the UK government can actually do? Also – I thought ‘commodity profiteering’ and ‘corporate profiteering’ were caused by British listed firms? How is he going to implement measures on a global basis?
Second, the driver of inflation was not wages but interest rate policy was solely designed to impact on wages and net household incomes. The prescription missed the cause of the malaise as a result.
Like so many of his observations there’s a partial truth here. Inflation isn’t solely driven by wages but to imply no correlation at all between what happened during COVID and price rises is simply ludicrous.
Third, the supposed art of managing interest rate expectations, which justified the continuously rising rates (using the logic “do as we say or the beatings will continue”) does not have any impact on the short term speculations of commodity traders and corporate entities that can use price confusion to increase their profit margins, potentially in the losing term.
If it’s that simple (Commodity trade speculation) why isn’t he doing it? Is he thinking of nationalizing commodities? Could be an expensive business..
Third, there must be a clear out of central bankers. The wrong people, with the wrong training and the wrong mindset are doing the wrong job at considerable cost to society.
Central banking is necessary. It should also be very boring, and lack a significant policy component. Policy is a job for government.
‘First thing we do, we kill all the central bankers…’
or:
First they came for the Central Bankers
And I did not speak out
Because I was not a Central Banker
Then they came for the Far Right
And I did not speak out
Because I was not on the Far Right
Then they came for the Neoliberals
And I did not speak out
Because I was not a Neoliberal
Then they came for the Wealthy
And I did not speak out
Because I was not Wealthy
Then they came for those who legitimately passed accountancy exams without the use of a ringer
And I did not speak out
Because I was not someone who legitimately passed accountancy exams without the use of a ringer
Then they came for those who were still allowed in the pubs of Downham Market
And I did not speak out
Because I was not someone who was still allowed in the pubs of Downham Market
Then they came for me
And there was no one left
To speak out for me
These interest rate rises…..Experts here will confirm, but doesn’t it takes months (18?) for interest rate rises to have an effect on inflation. The BoE have raised rates every month for 13 months.
Isn’t this is a bit like Fred having a headache and taking two painkillers which take 20 minutes to work.
After one minute:
“No change yet, let’s take two more”
After two minutes:
“No change with this bloody headache, let’s take another two para’s”
After three minutes:
“Cor this one’s a brahma, two more para’s I think”
After four minutes:….
“Another two – these Tesco para’s are useless. I knew I should’ve bought Anadin”. ……….etc,etc.
After 17 minutes and the thirty sixth paracetamol Freds’ wife calls the ambulance as he has slipped into a coma…..
I fear the UK economy is slowly slipping into a coma.
“We used to have quiet corners of walled gardens for folk like that” the potatoes already painted himself into the proverbial corner of said garden. Who takes notice of his inane ramblings ? – certainly not the Tories, nor the labour party or anyone else of consequence. As far as i can see he’s left with the SNP (busily destroying itself) The Guardian newspaper (the lefts version of der sturmer ) and the random gaggle of ass kissers that comment on his site. I can’t see the great and the good hurrying to visit him in Ely (I’ve been there – no thanks) or inviting him to London to discuss his latest crackpot theories. It’s lucky that he has an unparalleled ability to fall out with everybody, because there’s plenty on the left who believe in the sort of rubbish he propagates.
Adolff, I think it’s more like taking a quarter of a painkiller at a time, when a dose of two whole ones is needed. Or, to put it another way, wondering why quarter-point interest rate rises have had no effect six weeks later, and wondering why quarter-point increases every six weeks still aren’t having an effect a year later.
Actually, I’d like to know how increasing interest rates control inflation, as well. If by control you mean stop it rising or reduce it. Interest is a cost & costs increase prices. Reduce demand? Any person’s interest payment is somebody else’s receipt. No actual money’s being taken out of the economy. Your real trouble in high inflation is people trying to spend what money they have while it’s still worth something.
I expect it’s another macro-economist thing. Something must be done & this is something. Like when interest rates were being reduced to negative. Like all things economic, shooting economists would be a good place to start.
I think higher interest rates are supposed to incentivize people to save money rather than spend it. Particularly in an environment where prices are rising faster than the value of savings.
That’s what I meant when I was rubbishing interest-rate rises of a quarter of a per cent. They’re not going to close that gap in any effective way. A couple of a per cent all at once, on the other hand, might have an effect on savers’ spending habits.
Paul. You’d need to get the interest rate substantially more than the inflation rate to encourage savers. Where’s the incentive to save if you lose money doing so?
An on inflation:
According to this, something’s been going on we were assured wasn’t
https://www.telegraph.co.uk/business/2023/07/03/supermarkets-driving-up-petrol-prices-6p-litre-regulator/
Doesn’t surprise. During times of high inflation people become inured to rising prices. And sellers will use that to raise (or not lower) prices. Because people will think (or say) “They wouldn’t do that, would they!” And they’ll even follow their competitors up. Why not if the money’s there to take?
Well, if the question were only one of whether real interest rates on your savings are positive or negative, then everyone would completely empty their savings and purchase anything at any price at at time of negative real interest rates.
But in reality there’s also the question of whether you’re better prepared for the uncertainties of the future by holding onto savings or by liquidating those savings to purchase ‘stuff’ now in preparation for that future.
There comes a crossover point where interest rates, even if negative in real terms, are high enough to make holding onto your money a better option.
For instance: inflation at 10%, interest rates at 1%: “Sod it, I’m going to buy a new car before I can’t afford a new one.”
Inflation at 10%, interest rates at 1.25%, or 1.5%, or 1.75%, ditto.
But inflation at 10%, interest rates at 8%: “I don’t actually need a new car right now; I think I’ll wait and see what newer, better, cheaper models might be around in a couple of years’ time.”
I think I’ll wait and see what newer, better, cheaper models might be around in a couple of years’ time.”
I believe you’ve described the inflection point there. If people think they’re greater value in the future. Which would be when they expect inflation to be falling significantly. But how do you get from here to there?
Maybe just the general expectation that given enough time, things do get made better and more efficiently, and hence offer better value. The question is what that length of time is, and whether interest rates on savings are high enough to justify holding onto your money for that expected length of time.
Good discussion though. If Tim is reading this, I have a nasty feeling that he’s having a quiet chuckle at you and me working through a theory in real time that someone explained in detail a couple of centuries ago.
Very droll Mr V_P
Who takes notice of his inane ramblings ? – certainly not the Tories, nor the labour party or anyone else of consequence.
I think Mr V_P would agree that you’ve already been living in Murphyworld for several years. He just doesn’t get the credit. He’s the unrecognised hero of modern economics.
Inflation – too much effective demand chasing too few goods and services. Yes, obvs, money printing, but that increases effective demand, there’s more cash around. So, interest rate rises slow the whole economy. Fewer people invest etc. Also, fewer people borrow and yes, borrowing does increase the wide money supply (that part of MMT is correct lending creates credit which is wide money). So, increasing interest rates both reduces wide money supply and also reduces demand. Should, therefore, reduce inflation.
Couple of centuries back folk didn’t really think about inflation – gold standard. Last 50 years, perhaps. And not a chuckle at you, no. But a chuckle about Spud. Because he tries to work through these things all on his own. Both without the sparking off another who see the gaps. But also insisting that everyone who has thought about these things this past 50 years must be wrong – in the face of the Immaculate Spudness.
And people still get surprised. 20 years back people started to notice some – only some – saving more cash when interest rates were lower, inflation higher. Eh? People were trying to save an amount that would allow a certain lifestyle at some point in the future. If those savings were going to be worth less and also they’d earn less interest in hte interim then more had to be saved now to get to that desired level of savings/standard of living.
One of the reasons economics – even microeconomics, this stuff, the stuff we think we do know about – is complicated is that we’re describing the actions of humans, who are complicated beings.
The idea that there’s a switching point, where we go to spend the stuff right now before prices move, is that swtitch to hyperinflation – or as I call it, the hypervelocity of money.
So, interest rate rises slow the whole economy. Fewer people invest etc. . .
That’s a fine response to the effects of politically motivated money printing on a stable or shrinking economy (Covid shutdowns and handouts), but if the demand is genuine (say, reindustrialising at home due to disengaging from communist China) then it’s an idiotic response. The economy needs to grow so the government slows it down.
The government is like morons on a boat. They all stood on one side to avoid the wind and made the boat lean over, so now they’ll all rush to the other side and capsize the fucker.
Ah careful Tim.
Inflation, like the poor, is always with us. In the past it was often natural disasters, wars etc that had a direct effect upon the lower rungs of the economy – bread would go up in price for instance after a bad harvest. Of course that sort of thing is transitory.
Systemic inflation was caused, then as now, by government policy – often in the shape of coin debasement or poorly thought out money making schemes ( eg Scotland and Darien, selling noble titles ) which unbalanced the economy.
20 years back is an interesting figure, Tim. That’s about the time some very stupid government economics were done that we’ve spent the past 15 years trying to dig ourselves out of the shit of. And looking at today, we’re not even nearly done. They’re probably creating the next pile of shit as they go.
Do you think they’ll ever learn?
Like your simile. But the crew of the boat need to deaf blind & drunk to get the full picture.
Bill Mitchell writes:
I note that there is discussions out on the Internet about the split between Warren’s current position on monetary policy and inflation and the view held by the so-called MMT academics (which must include yours truly).
The point is that there is no single – applies in all situations – MMT rule on this.
In general, MMT economists note that monetary policy that relies on interest rate adjustments is uncertain in impact because, in part, it relies on distributional consequences whose net outcomes are ambiguous.
Creditors gain, borrowers lose.
How does that net out?
Not sure.
We also point to the likelihood that interest rate increases will have inflationary impacts via the impact on business costs and landlord borrowing costs.
But, there is some nuance that has to be applied when considering temporality – that is, the impacts over time.
The crude version of the ‘split’ is that Warren believes the interest rate increases are in actual fact expansionary because they are prompting a fiscal policy expansion via the interest payments on the outstanding debt.
In our discussions in Kyoto, I outlined my position (the ‘academic’ position) like this.
1. No-one really knows whether the winners from the interest rate rises will spend more than the losers cut back spending.
The evidence is that wealth effects on consumption spending are relatively low when compared to the income effects.
But there are many complications – such as saving buffers etc – that make it hard to be definitive.
2. In the immediate period after the interest rate rises, the spending responses from debtors is likely to be restrained because they have capacity to absorb the squeeze by adjusting their wealth portfolios (run down savings etc).
And, at that temporal period, the interest rate rises are likely to be inflationary as businesses pass on their increased borrowing costs in the form of higher prices, and, as noted above, landlords pass on their higher mortgage servicing costs as higher rents, which, in turn, feed into the CPI figure.
3. But in the medium- to longer term, if interest rate rises move past some threshold, the impact is to slow spending and increase unemployment.
Eventually, those who benefit from the interest rate increases, who typically have a lower marginal propensity to consume (how much they spend out of every extra $ received), run out of things to buy and pocket the bonuses.
And eventually, the spending cuts from the debtors, particularly lower income mortgage holders, begins to dominate.
The Australian data clearly demonstrates this temporal effect.
The problem is that when a nation reaches this point, given the delays in data publication etc, the damage is already done.
So in trying to understand these different accounts we have to appreciate several things, which includes:
1. The level of household debt – the higher the debt, the more the negative impacts of the interest rate rises will be on spending.
2. The proportion of population that has mortgage debt – the higher the proportion the more likely it is that the medium- to longer-term effects will become dominant.
3. Crucially, the proportion of mortgage debt that is fixed rate compared to variable rate.
This last consideration is important in understanding why we might consider the dynamics of interest rate rises in the US (which is the basis of Warren’s conjectures) to be different to elsewhere.
“businesses pass on their increased borrowing costs in the form of higher prices, and, as noted above, landlords pass on their higher mortgage servicing costs as higher rents, which, in turn, feed into the CPI figure.”
This is the bit I’ve never understood. If a business or landlord can charge more, why wouldn’t they do so regardless of interest rates? Why weren’t they already charging those higher prices anyway? Surely what happens is that their net profits decrease, possibly to the extent they have to go out of business, or have to sell their properties at a low price. Either way, you get a contraction in the economy, and hence a restraint on inflation.
(To be fair, I’ve had the same problem with the notion that higher taxes on businesses are simply passed on to the consumer in the form of higher prices; I don’t see how that works, for exactly the same reasons; surely what actually happens is that taxation beyond a certain level just makes a business unviable.)
It ignores the lag, doesn’t it Paul? Most rentals will be on some sort of contract with review periods. So the bite could come any time between now & two or three years out. It’d be hard to separate that from other pressures.
But as to you’re points, I suggested what might happen in the earlier comment. It’s as much psychology as economics. Raising prices depends on consumers accepting the increases. In times of high inflation, people are bombarded with all sorts of price increases. They lose touch with what they expect things to cost. The effects of competition actually falls because people reduce on shopping around. There’s a limit to how much you can do, especially when you start feeling it doesn’t make any difference. That’s why I think suppliers sometimes use it as opportunity to increase profits. They see competition has raised but they don’t see themselves getting increased turnover as a result. So why not follow?
@ Paul, Somerset
The answer is that when enough landlords or businesses are driven out of business by the higher interest payments on their borrowings, competition is decreased and the survivors can raise rents/prices to *partially* compensate for the higher costs. Of course the rises will be accompanied by screams from tenants/customers and the left-wing press – I have recently seen outraged complaints that rents have gone up by 4% in a year (which is a 6% fall in real terms).
I totally understand what you’re saying, bis. I just find it hard to believe that businesses and landlords can suddenly get away with that collective price-raising when their costs increase; but that they either couldn’t get away with it in former times, or simply didn’t try. Similarly, I find it hard to believe that the general mass of consumers can suddenly find that extra money to pay the higher prices, even if they think they have no option.
Nut I have to admit it’s a possibility. I just don’t understand how normal people think and live sometimes!
I found myself doing this with juice for the cars. Carrefour’s always been competitive. Similar to the big Repsol chain. What’s the point in driving another 5 km for a cent or two? Until I realised one the indies off the highway is 15 cents cheaper. And that was only because I was using their carwash. We’re now something like 70 cents off the peak price. Until then I hadn’t got a clue what gas should cost. I might have spent a hundred euros more than I needed to in the past few weeks.
Good point, johm. But if landlords sell up and leave the game, those houses don’t get bulldozed. They get sold to owner-occupiers, and the supply of potential tenants falls accordingly. So supply and demand falls into equilibrium again.
Anecdotally, I took out a variable rate mortgage in 2009. I’ve had relatives (thank you relatives, really love you for thinking about me) who’ve been in touch asking if they can strike an arrangement to pay it off on my behalf. Makes sense all round, I would repay them at a rate greater than they can get from their savings account but less than being charged on my interest by C&G.
Have mulled and taken one of the offers, but the point is this: there must be loads of nice people who are dumping their savings into clearing others mortgages.
And mortgage repossessions even now are 2/3rds the pre-pandemic number.
New lending is severely restrained though, about 40k a month new mortgages now compared to 60k a month in the last month of 0.15% rates, and that has to be affecting M.
It would be fun to have a BoE mandate to increase Q by say 2% a year especially in housing permissions and domestic energy permits, but it’s not going to happen, and V is outside any control in a free-ish society, so raising interest rates are the only tool the BoE has to affect P.
“This is the bit I’ve never understood. If a business or landlord can charge more, why wouldn’t they do so regardless of interest rates?”
Possibly because they aren’t all money grabbing arseholes? There are plenty of landlords and business owners who are happy making what they consider a ‘fair’ profit and aren’t out to screw every penny out of a situation. But faced with a rise in their costs and rapidly shrinking profit margins they are forced to raise prices closer to the ‘money grabbing arsehole’ rate. Thus affecting the overall average price/rent.
Like I keep saying – not everyone maximises money above everything else, in the way economics assumes they will.
But the crew of the boat need to deaf blind & drunk to get the full picture.
The boat would probably be safer. Amusingly, behaviorologists have actually done some studies on this. Multiple mice placed on a tray on water are usually OK because having no awareness of consequences they move randomly and their weights even out. Nautically unskilled humans are nevertheless aware they can capsize a boat and collectively overcompensate for any listing and leaning. Hence many YouTube videos.
Booze tax increases in August, apparently. When is it applied to imported wine? At import? At retail sale?
When to English wine? Presumably not at fermentation? To beer? On leaving the brewery?
Put otherwise, when is our last chance to buy booze at the old rates of duty?
Define ‘fair, Jim. Because to me a fair price is one people can afford to pay, and I don’t see how that differs in any way from the full market price
” Because to me a fair price is one people can afford to pay, and I don’t see how that differs in any way from the full market price”
Not everyone has the same ability to pay. So what is fair to one tenant might be totally unaffordable to another, and landlords may tailor the rent to the tenant. I personally know of a BTL landlord who is currently subsidising the rent out of her own earnings from employment due to interest rate rises (ie the rent no longer covers the mortgage payments) because she doesn’t want to throw a single mother on the streets. Like I said, not everyone has money as their primary goal.
Jim, what you’ve described is exactly my point: that the landlord can’t increase the rent, because the tenant can’t afford it!
@Paul, Somerset
If a business or landlord can charge more, why wouldn’t they do so regardless of interest rates? Why weren’t they already charging those higher prices anyway?
When there is a competitive market, any supplier has to be concerned with volume vs margins. At the extreme ends, if you sell a bag of oranges for 1p then you’ll lose money on every transaction and if you sell them for £50 you’ll never sell any. In between, the rational vendor settles on a figure that maximises profit on the profit-per-unit x units-sold basis. When the wholesale cost of oranges increases, the profit at the price you were originally selling decreases — possibly even turns negative — so you put your prices up so that you are still making a profit, albeit a smaller one because your volumes are smaller. When the wholesale price goes up for all the retailers of a particular good, they all have to do the same calculation. Prices go up more quickly than they come down because the profit-per-unit at any price is a hard, known number, but the effect of pricing on unit sales is more guessy. Aggressively raising prices to avoid making negative margin has no drawbacks, but reducing prices faster than necessary when the costs decrease in order to maybe gain market share is not so immediately bankable.
Similar for landlords. They’re not selling on volume, but they are running into the risk of a tenant moving out or being unable to pay. In either case there will be void and reletting costs. You will set the rent at something that balances the profit with the risk of losing your tenant; if your costs increase such that you’re making a loss, you have to increase rents even if this increases the risk of your tenant moving out/going bust.
Thank you for that detailed explanation, Matt.
Why would the oranges importer not attempt that experiment with retail price against volume sold BEFORE higher debt-servicing costs forced him to? After all, there’s an incentive to have done so, because higher retail price at lower volume sold means lower overheads and higher profits. (If you’re importing fewer oranges, you’re reducing your transport costs, and if you’re selling fewer, then you’re reducing the retail space needed.)
The landlord example in fact offers another reason why a business might not be able simply to raise its prices: it will be in competition with other businesses who, for various reasons, will be content to continue operating at a loss. Perhaps those other firms will look at the costs already sunk into establishing their businesses, and at the profits already banked, and be willing to continue in the market for some period at a loss with a view to getting those losses back when the good times come round again. In the landlord’s case, they stay in the game, even in the face of inadequate rental proceeds, because they’re after the long-term capital gains from owning property. Similarly the oranges retailer wants to be able to retain an established greengrocer’s for the future.
At the extreme ends, if you sell a bag of oranges for 1p then you’ll lose money on every transaction and if you sell them for £50 you’ll never sell any. In between, the rational vendor settles on a figure that maximises profit on the profit-per-unit x units-sold basis.
If only. This is where economic theory parts company from what people actually do. I can think of endless examples where vendors of goods & services are ignoring exactly that. It’s the inability to discern that the possible profit on a unique transaction is different from the potential profit on all transactions. But is it surprising? How many people have economics degrees? They think they know what they do. They don’t look much further. And since most of an economy is comprised of people like that…
“what you’ve described is exactly my point: that the landlord can’t increase the rent, because the tenant can’t afford it!”
But she could chuck said tenant out and get one that could afford a higher rent. Or raise the rent so the single Mum was forced to leave, and then get a market paying tenant. The landlord has considerable market power to raise the rent to a market rate, and have plenty of applicants wanting to rent at that price (rentals are hard to come by these days), but she leaves it as things are, for her own peace of mind. As I said, not a money grabbing arsehole.
“This is where economic theory parts company from what people actually do. I can think of endless examples where vendors of goods & services are ignoring exactly that. It’s the inability to discern that the possible profit on a unique transaction is different from the potential profit on all transactions. But is it surprising? How many people have economics degrees? They think they know what they do. They don’t look much further. And since most of an economy is comprised of people like that…”
Exactly, economics is the study of people, pretending its the study of numbers. Its not surprising no economist ever makes better predictions than throwing darts in a dartboard.
I think we both know what goes wrong with economic planning, Jim. The presumption that people are economically rational.
Jim, I’m not convinced that there really are prospective tenants out there able and willing to pay more to rent that property. The example we have of a real tenant who wants that particular dwelling is one who can’t afford to pay any more for it. And from the landlady’s point of view, evicting the current tenant would involve hassle, expense and uncertainty. And that is something which is going to weigh on any other, less altruistic landlords as they consider whether to attempt to install a higher-paying tenant.
Anyway, I’ll accept that what you’re saying is correct, and that for reasons of conscience some landlords don’t raise rents. The effect is still the same: rents don’t go up, because, if they could, they would have gone up before. Even if the constraint is an ethical rather than financial one.
But if landlords sell up and leave the game, those houses don’t get bulldozed.
The flats above shops may as well be bulldozed. From experience, if those landlords leave the landlording game, the flats are not sliced off the rest of the building, they just sit unused and empty. I know the flat above my shop would be incredibly difficult to seperate out into a seperately *saleable* unit, and the flat I occupy is even worse, it has its electricity meter in the shop downstairs!
” I’m not convinced that there really are prospective tenants out there able and willing to pay more to rent that property.”
Its a 2 bed end terrace house (admittedly bedroom no 2 is not much beyond a study, but so are all the other 2 bed places) in a decent privately owned area (not council estate, not benefits alley). I’ve just been on Rightmove and similar sized and located houses are going for £900-1000/month. My friends rent is £575-ish, that ball park. You’re telling me she couldn’t get a tenant for £850-900 in a flash?
Lots of people rent properties out at below market rents, for all sorts of reasons. And if they face a rise in costs then they will raise those rents, and have the ability to do so, because of the low threshold they are starting from. My friend is being extremely soft hearted for sure, not many would do what she is doing. Even she plans to raise the rent once the kid becomes 4 or 5 (if you have a small kid the DHSS will only pay the rent suitable for a 1 bed property, on the basis it can sleep in the same room as the mother. Once the kid reaches a certain age the tenant qualifies for a 2 bed house, so the kid can have its own room. The DHSS will then pay 2 bed house rents.) So the rent will rise at that point, due to cost increases.
I’m in touch with many landlords. One of them does rent out well below market value. That’s because they are renting to one of their extended family and not using an AST. But they paid nothing for the property as they inherited it. So any income is profit for them. They just need a tenant so that they aren’t liable for bills and council tax.