UK inflation rate falls to 4% in March

[Beach Hut]

Excellent news, should put an end to this resounding own goal that would happen if interest rates go up.

BBC News - UK inflation rate falls to 4% in March

 

[nwgull]

Considering the VAT and oil price rise since last year, that's actually quite low.

 

[sten_super]

Excellent news, should put an end to this resounding own goal that would happen if interest rates go up.

BBC News - UK inflation rate falls to 4% in March

Except that prices still rose, just by 0.3% between February and April rather than the 0.6% seen between the two months last year. Food prices came down, which is good news, while transport (dominated by a 2.7% rise in at-the-pump prices) and furniture & fittings prices rose.

 

[Superphil]

Is it at all possible that the coalition government might be getting something right?

 

[severnside gull]

Yup.

Inflation is only double the government's official target and with fuel costs continuing to rampage ahead at an unchecked average of 1p per litre per week they won't be hitting target any time soon unless the government decide to change the way inflation is calculated (again!).

 

[libra-gully]

That is ok then. Except for the fact that the basket of goods that determines the inflation rate is loaded incorrectly by governments and economists to reflect their own requirements.

Back in the real world, the cost of everything is going up. Don't be fooled by a headline.

 

[sten_super]

Yup.

Inflation is only double the government's official target and with fuel costs continuing to rampage ahead at an unchecked average of 1p per litre per week they won't be hitting target any time soon unless the government decide to change the way inflation is calculated (again!).

Er, I think you are getting the Bank of England and the government confused.

Superphil, there's not much that the government can do to tackle inflation, especially when a lot of it is 'imported' (i.e. it's coming from rises in the price of goods we import). They've done well to limit public sector wage rises (the concern is always that workers, especially unionised workers, will push for inflation-busting pay rises) which has stopped inflation spiralling, but beyond that it's largely down to the machinations of the firms and what the market (i.e. consumers) will bear.

It's been surprising that through much of 2010 prices have risen faster than input costs imply they should in some sectors, suggesting that producers have been increasing their profit margins; this data may signal an end (or at least a slowing) in this process.

 

[SeagullEd]

I wouldn't say this is a 'good' result at all. Although, granted, it's better than the rate rising higher.

This isn't the coalition government getting something right, but perhaps the Bank of England rightly (hopefully) forecasting the inflation rate will fall - a view I don't share.

The problem is, the way I see it, the Bank of England are given a pseudo-mandate to target inflation but they are expected to 'support the government' but to what extent is very unclear. The tories would be more restrained in their cuts and tax rises if the Bank of England, well more importantly the MPC, did target inflation and so forced interest rates up thereby mitigating the scope of government action. Clearly, I'm against the cuts! But instead, the MPC risks losing a lot of credibility.

The thing is, people think these lower interest rates are going to be good for business for investment- but to a large extent I this is a bit of a fallacy. Firstly, a lot of investment projects are often financed by retained profits and the like. Investors attach a much greater risk to increased leverage now so firms taking on debts are then hit by shareholders demanding higher returns because their shares are now more risky. Secondly, the banks - because of such high inflation - if they lent at such minor rates would be earning negative real returns... there is no incentive to lend! This isn't in the national interest given the importance of financial services to the UK economy and the fact we now actually own a large part of numerous banks.

On a purely speculative level, I don't think the majority of peple truly believe that in 12 - 18 months time with BoE action as it is the inflation rate will be 2%, this causes a lot of uncertainty.

It's arguable whether or not government action - such as the VAT rise - should be in the inflation measurement. But I don't think the government will/could change the method of measurement because its, in its current form, comparable with HICP and I can't see them wanting to fall out of step with Europe in any way.

Far from a celebration I think this is still cause for worry. And even if inflation does fall, I fear it'll be more of a result of a floundering economy than thanks to policy.

 

[SeagullEd]

In response to libra-gully it's actually more likely that the way inflation is measured (with respect to this basket of goods you talk about) overestimated infaltion i nthis respect. (in other respects, unrelated to baskets of goods, it underestimates).

I disagree with sten-super, the government in their fiscal squeeze are directly causing prices to rise. Moreover, if they concentrated on trying to boost the economy (which I would agrue theyre not currently doing) then the BoE would not have to focus on this as much as they are and thereby would raise interest rates. With inflation under control, there is more certainty in the economy and in my opinion the growth + increased stability that would result will do more for investment than low interest rates will do. Clearly, here I disagree with the government who I would say seem to believe that low interest rates will spur on the private sector regardless.

 

[Shropshire Seagull]

The other stat I thought was good news is the size of the private debt - the dosh you and I owe - mortgages, credit cards and other loans. Seems we paid more off this in the last 12 months than in the last 20?.

Does this signify a change in culture [only slightly] away from the buy now pay later of the recent past?

 

[Westdene Seagull]

Back in the real world, the cost of everything is going up. Don't be fooled by a headline.

Disagree - if you shop wisely you can still buy what you normally do but for cheaper than a year ago. I know our monthly shop has dropped by about 7% in the last year but we still get everything we need.

Fuel on the other hand you can't avoid the rises.

 

[Don Quixote]

ONLY 4%?! WOAH AMAZING. No in all seriousness that isn't good, interest rates should go up before it spirals out of control.

 

[Westdene Seagull]

The other stat I thought was good news is the size of the private debt - the dosh you and I owe - mortgages, credit cards and other loans. Seems we paid more off this in the last 12 months than in the last 20?.

Does this signify a change in culture [only slightly] away from the buy now pay later of the recent past?

I think you're probably right. For the first time in a long time I've sold assets to pay off debts. It is now more important to me to be debt free with less assets despite being able to afford the debt.

 

[Westdene Seagull]

ONLY 4%?! WOAH AMAZING. No in all seriousness that isn't good, interest rates should go up before it spirals out of control.

Rubbish - inflation has dropped even though interest rates have remained the same. Raising interest rates will cause more issues than a 4% inflation rate will.

 

[sten_super]

I disagree with sten-super, the government in their fiscal squeeze are directly causing prices to rise. Moreover, if they concentrated on trying to boost the economy (which I would agrue theyre not currently doing) then the BoE would not have to focus on this as much as they are and thereby would raise interest rates. With inflation under control, there is more certainty in the economy and in my opinion the growth + increased stability that would result will do more for investment than low interest rates will do. Clearly, here I disagree with the government who I would say seem to believe that low interest rates will spur on the private sector regardless.

Genuine question, how do you believe the government are encouraging inflation? I'd argue (as a quasi-monetarist) that what they are doing is slowing the velocity of money, and to a greater degree than is reflected in the output figures, and as such are putting downwards pressure on the price level.

The credibility of the MPC is largely shot at the moment; their recent inflation forecasts have been miles off-base, and the credence for their decision making is in doubt.

On your later point about debt; there was a large hike in the savings ratio (which was actually negative at the time) at the start of the crisis. There has, as such, been something of a mentality change, but history suggests that this is a temporary reaction to the expected shrinking of incomes, rather than a long-term result. The latest OBR forecasts have consumption (at least in value terms) increasing, against a backdrop of falling real incomes; they are expecting private debt to increase over the next couple of years.

 

[SeagullEd]

Rubbish - inflation has dropped even though interest rates have remained the same. Raising interest rates will cause more issues than a 4% inflation rate will.

Completely disagree (see my above post)

I understand some of the arguments such as real value of debt rises, business investment might fall (personally Im sceptical) and our currency might appreciate.

BUT, its only the real value of old debt that might increase. Moreover, I think the rise in interest rates should be accompanied by a slowdown in the cuts (I suppose to an extent I agree with you, it shouldnt be raised with things as they are). I personally don't buy into the idea that business investment would suddenly fall. Banks rightly are reluctant to lend with inflation so high. It's the ucnertainty and lack of growth in the economy that's holding investment back more than anything. Government would have to take more reponsibility for stimulating growth if the interest rate rose. Currency appreciation is inevitable (perhaps) if and when we recover. An export led recovery is all well and good but the longevity of it depends on where exchange rates end up.

 

[SeagullEd]

Genuine question, how do you believe the government are encouraging inflation? I'd argue (as a quasi-monetarist) that what they are doing is slowing the velocity of money, and to a greater degree than is reflected in the output figures, and as such are putting downwards pressure on the price level.

The credibility of the MPC is largely shot at the moment; their recent inflation forecasts have been miles off-base, and the credence for their decision making is in doubt.

On your later point about debt; there was a large hike in the savings ratio (which was actually negative at the time) at the start of the crisis. There has, as such, been something of a mentality change, but history suggests that this is a temporary reaction to the expected shrinking of incomes, rather than a long-term result. The latest OBR forecasts have consumption (at least in value terms) increasing, against a backdrop of falling real incomes; they are expecting private debt to increase over the next couple of years.

Completely agree about debt - not sure what point I made that you're responding to (?). But I don't think the savings ratio will fall until confidence in the economy and economic growth are restores - something the government aren't doing in my opinion. A lot of people still fear job loss.

On a seperate point. I would propose that increasing interest rates would send a strong message out. Firstly, that economic growth is coming, secondly, that they will probably rise further and lastly that they are serious about the inflation target. I think, as a result, we wouldn't actually see a huge rise in saving but spending would increase as people attempt to catch the low interest rates offered on durables (spending on which has plummetted in recent years) etc. I don't even think it would take a large rise in interest rates because of the appreciation which would result meaning inflationary pressure from imports fall. Yes, it could be argued this would stunt growth. But I don't think we should rely on a low exchange rate - we need our goods to be competitive at what will be the equiblirum exchange rate so suppressing the exchange rate will do nothing for us long term.

How I think the government is encouraging inflation...

1) their tax rises (including VAT etc) directly pushed inflation up. This may have caused a slight wage-price spiral, although probably not a large one. People have commented about wage growth under control but look at what the government have just done to minimum wage.

2) by suppressing economic growth (which I think they are doing) competition is less severe than it might otherwise have been as a lot of the weaker businesses have gone bust already. You could argue the opposite point, that a lack of economic growth means there is more price competition but since shareholders are on guard etc I see (as someone has pointed out) that profit margins are actually increasing a fair bit

3) focus on export led growth is often accompanied by a reliance on a bouyunt (not spelt right) domestic market - maybe in part explaining the increased profit margins.

4) Although its not directly encouraging inflation, it is preventing dealing with inflation: they are overreliant on the BoE stimulating growth with low interest rates whilst they make ideological cuts (I dont think you can argue theyre purely economic) - the BoE primary function is to deal with inflation which I dont think they're doing. The less faith people have in the bank of england and inflation rates the more they will rise - their promises of stability are not credible so to protect themselves demands/rates increase (e.g. see the complaints about how much banks are charging borrowers erc).

5) as touched on previously, because of economic uncertainty - not helped by the government - I beleive our currency is currently undervalued thereby pushing up inflation on imports of final goods and raw materials.

 

[Uncle Spielberg]

Completely disagree (see my above post)

I understand some of the arguments such as real value of debt rises, business investment might fall (personally Im sceptical) and our currency might appreciate.

BUT, its only the real value of old debt that might increase. Moreover, I think the rise in interest rates should be accompanied by a slowdown in the cuts (I suppose to an extent I agree with you, it shouldnt be raised with things as they are). I personally don't buy into the idea that business investment would suddenly fall. Banks rightly are reluctant to lend with inflation so high. It's the ucnertainty and lack of growth in the economy that's holding investment back more than anything. Government would have to take more reponsibility for stimulating growth if the interest rate rose. Currency appreciation is inevitable (perhaps) if and when we recover. An export led recovery is all well and good but the longevity of it depends on where exchange rates end up.

This is spot on. The Bank of England f***ed up big time in 2007 by keeping interest rates far too high for far too long and they are f***ing up big time again by keeping interest rates far too low for far too long.

 

[Uncle Spielberg]

The euro rate is 1.25% now and went up this month. We should be looking at 2% by the year end as a slow transition to a normal rate environment is essential. What we are in danger of is becoming another Japan and their interest rates of 1% or below for 15 years is a harbinger of what we have in store unless we can heat the economy up and that includes increasing interest rates.

 

[Arthritic Toe]

Its a shit sandwhich and we've all got to take a bite.