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If only he knew

First, interest rates are not coming down soon, if Pill gets his way. Apparently, inflation at 2% or thereabouts is not enough to justify bringing interest rates down from 5.25%.

Someone who wishes to comment upon matters economic really, really, ought to know about matters economic.

Smurf is the one who has kept saying that it’s food and energy – things not amenable to interest rate changes – which have been driving inflation. Therefore interest rate changes won’t change inflation.

No, leave aside the truth or not of that. Let’s just accept his reasoning. OK:

Core CPIH (excluding energy, food, alcohol and tobacco) rose by 4.2% in the 12 months to May 2024, down from 4.4% in April; the CPIH goods annual rate fell from negative 0.8% to negative 1.3%, while the CPIH services annual rate eased slightly from 6.0% to 5.9%.

Core inflation is inflation stripped of those non-interest rate concerning items. And is, thus, the inflation that is amenable to interest rate changes. Core is well above the inflation target. Therefore the puishment beatings won’t stop.

Note that we can reach this by Spud’s own reasoning. But Spud can;t reach it by Spud’s own reasoning. Ho Hum.

This is before we get to the real crux of the matter. Spud is arguing that the real interest rate should be negative. Why?

4 thoughts on “If only he knew”

  1. Negative real interest rates are a hidden tax on wealth that only taxes liquid assets but increases the price in monetary terms of semi-detached houses in Ely.
    Having answered the question, I should like to add that it is the “decent working class” who suffered most from this under previous Labour governments as they tended to keep their modest savings in building society accounts while the middle class invested their larger savings in houses or stock exchange investments or small businesses which tended to maintain their value (so the nominal price rose as the £ was progressively devalued).

  2. Core CPIH does appear to lag regular CPIH by a few months; and the trajectory is clearly downward. Spud might be right in his answer, though as my old maths teacher would say, his working-out is wrong.

  3. Person in Pictland

    “Spud is arguing that the real interest rate should be negative. Why?”

    Because he knows the new govt will need to borrow humongous sums and hopes that it will be dead cheap to do so.

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