大象传媒

Hi Evan,

I'm looking at the 'fan chart' prediction of future CPI inflation in the inflation report, and it only seems to go up to about January / February time - for April / May it shows falling inflation down to around 2.5%.

Do you have any idea why this is? Surely if the fan chart is worth anything at all it should incorporate the fact of last month's 3.1%, not treat it as a statistical outlier in the pale pink section of the fan chart? I'm sure there's an obvious explanation and that's why nobody else has mentioned it, but I am very puzzled!

Thanks,

John

If the 'China effect' (where cheap Chinese imports depress prices) is disappearing (owing to wage and commodity inflation there), then its disappearance uncovers the inherent endemic inflation here. In that case, I would expect interest rates to rise to above 7% or more by this time next year. 6% will not seem to be so shocking then.

Evan, Start with Sterling M3 and project that about 18 months into the future. The reason why I went to South America for 3 months in 1988 and my chums bought property was that M拢 in March 88 showed 25% growth - suggesting inflation rising to about 9% by late 89 (as it did) and an interest rate crunch (as happened).

Beyond that, remember that the BoE is not independent. Most members are appointed by G. Brown and have complied with his requirement to keep rates low to fund his public sector expenditure explosion. The bank has been consistently wrong for at least 5 years with rates about 0.75 -1% too low - the rank stupidity was shown when rates rates fell to 3.5%, which is 0.5% below the liquidity trap (ie; rates make no real difference but stoke asset prices). I did say so at the time - as I said in March 88 and when I predicted the dotcom crash. 88 was simple really - the rest okay is down to an EBS MBA. But what do I know eh?

How long before raising interest rates fails to curb inflation? As a nation we carry a huge amount of debt per head of population. This means that any increase in interest rates creates a significant increase in household outgoings for a large percentage of the population. The result of raising interest rates could produce a significant upward pressure on wages, because cutting back on non-essentials fails to cover the effect of the rate increase. This in turn would fuel inflation rather than dampen it, would it not?

As a 3rd year economist at the University of London, I've learned that inflation expectations play as big a part in the real future level of inflation as the central bank does. Knowing this, as I'm sure economics journalists do, doesn't this give a role for the media in effective monetary policy? In fact, the act of supporting the BoE's decisions would itself have an effect on the UK's rate of inflation, especially from such a respected and widely read news source. Given that, planting fears of higher inflation becomes a self-fulfilling prophecy, and so surely should be avoided? Just a thought.

Why is every so amazed at interest rates as "shockingly high" as 6%? Has everyone forgotten what happened under the Tories in the 70's and 80's? I remember interest rates over 10% for ages and ages and ages. Now rates that high really WOULD hurt!

These looks like nominal interest rates from a period in which inflation was broadly on target. Does the same relationship hold if inflation moves above its target or would you need to start considering real interest rates? If that is the case, the numbers may suggest something higher this time around.

Surely the effect of "money" inflation (primarily property prices and the cost of the associated loans) is different from "goods" inflation (the cost of Chinese imports). It would seem that both are now subject to upward pressure. On top of that is the increasing cost of energy and other "global warming" effects. Perhaps the recent low level of interest rates has made people forgetful of what it is like to live under a regime of higher interest rates. That does not mean rates will not rise. My feeling is that we might well be on the way back to the days of negative equity, and that interest rates will not need to rise as far to get us there.

Any chance of seeing Stagflation in the UK in your opinion Mr Davis?

I agree with an earlier post. They should have kept rates higher. Keeping rates low has only fueled the debt gorging and now the UK economy is teetering on the edge. Raise rates to kerb inflation and this could cause far too many people to go into liquidation and house prices will collapse, but if rates are not raised, inflation climbs, household bills go up and people's debt gets the better of them and go into liquidation.

Due to earlier mistakes and government sticking their heads in the sand, pretending to believe in a new paradigm, we are now in a no win scenario, and lots of people will get hurt, and us Bears will get shouted at, even though we have been warning of it for the last few years!

Where do I see rates going to? I really don't know, but 6% is soon and will hurt, 7% probably by next summer and house prices will be in free fall (won't help CPI!!) and IR's could well go higher...except the BoE's remit will probably change so that they can lower rates even with inflation supposedly rising!

Yep, looks like stagflation is on the cards!

"Now rates that high really WOULD hurt!"

...mainly the people that have borrowed out of their depth...

Even,

Whilst most sensible people who follow figures closely will no doubt not only not trust nor believe the official inflation figures, the problem - that will soon become very terminal I believe - is that the Government and the Bank of England seem to actually think they are accurate.

Notwithstanding, most things we pay for (services, mortgages, council tax, recreation) all go up regularly above the rate of inflation anyway. Soon we'll just simply not be able to afford what we owe with the lower-increased wages we get.

My salary (if I'd not moved jobs or promoted) would have gone up to around 155% if it had followed inflation (but it has been less) and yet the LOWEST council tax rise was 45% over the same 10-yr period. the 30th lowest (and mine still wasn't on the list) was at 92%.

Surely someone has to do something about this, otherwise we'll have nothing left to pay with, and then the entire system would be in real trouble.

The problem as I see it, is that no-one has the clout nor the balls to stand up and actually effect a change. the people at the top are comfortably making enough money to not have to care - it appears.

The person who posted that interest rate rises would increase wages is mistaken.

If interest rates rise this has a negative impact on wages since wages are negociated with reference to the RPI which in turn would be negatively effected by an interest rate rise.

Basic economics really.

Rates do have the potential to rise significantly due to the huge supply of money (M3). However! - Gordon Brown has changed the official measure of inflation significantly (striping out council tax and housing costs ect... 'new' cpi) and this has produced a psuedo economy which could be catastrophic in the longer term, since the true measure of inflation is way above the official measure of inflation.

I doubt whether the inflation report can be treated as a serious inflation forecast. It is really a communication tool. If cpi inflation is not at two percent at the two year horizon, then it is a message announcing that interest rates are going to change more than the market expectations - on which the forecast is based - predict. Any significant miss would imply that the BoE had not done its job.

That said, I wonder if an official inflation forecast should be done by an independent institution, such as the ONS. It would probably not be considered appropriate for the BoE to compile the inflation measure that they target, but that is effectively what they are doing if they are aiming to control their own forecast of inflation at the two year horizon.

As regards interest rates, I do think that central banks generally have not given sufficiently explicit warnings about risks. If Mervyn King had prominently commented that interest rates had reached 15% in the previous decade and 7.5% within the last ten years, asserted the MPC鈥檚 preparedness to set similar rates if necessary, and warned borrowers to allow for such possibilities, he might have made the front page of the Sun and Mail, and damped the house price boom. Freedom to speak unpopular truth plainly is one reason for central bank independence. Alternatively, they could produce a fan chart for interest rates implied by their fan chart of inflation rates.

John: I suggest that the reason why the inflation fan chart does not hit 3.1% is that the numbers are quarterly, not monthly.

David Gibson, a key reason rising interest rates dampen inflation is because of borrowing by businesses. As borrowing costs for firms go up, they borrow and invest less, which means they need fewer workers, and so unemployment goes up. With higher unemployment, the fear of becoming unemployed increases, so workers are willing to accept lower wages, even if they still expect high inflation, and the result is that inflation comes down.

An alternative scenario to the above involves changing expectations: if higher interest rates convince the public that inflation will come down, workers will ask for lower pay rises, and so it will in fact come down, without requiring higher unemployment. This latter scenario is the ideal outcome, but relies critically on the Bank of England's credibility.

George,

I believe that there was (still is) an RPI Advisory Committee that was supposed to ensure that inflation is measured fairly, but that no meeting of this committee has been arranged since Gordon Brown became Chancellor. This is, I suggest, something that economic reporters (Evan!?) should investigate and ensure that people know about.

Changing the measurement of inflation downward is of course a wonderful way out for the government (and I don't see the BoE dying in a ditch about the issue if it forestalls unpopular action) and I think you will see more of it. This government is, after all, famous for spin! There are various methodological options, and each change will sound not unreasonable, but nearly every one will lower the measure, rather like the Tories did with the unemployment measure in the 1980s. The Boskin commission did something similar in the US.

The one to watch now is what they do with house prices. The FT ran an editorial calling for housing costs to be included on May 4 and Willem Buiter was talking about it on last night's Channel Four news (not that I prefer that to the Beeb!). Put house prices in the cpi with a big weight once they start falling, and, Abracadabra!, inflation is back on target! To his credit, Mervyn King did say he would not welcome another change of target, but refer to my earlier comment about central bank plain speaking!

The trouble with all this prediction of high interest rates and falling property prices is it all seems like "crying wolf".

When I bought my first house in 2000 everyone (including me) thought it was not a great time to buy, and that prices wouldn't rise much. But up they went.

Now it's 2007, we're buying our second house and the stories are here again. Is there really a wolf this time or not? I'm not going to change my plans on the offchance that there is.

Part of the reason for the interest rate rises has been the increase in property prices, brought on by demand exceeding supply.The buy-to let boom has resulted in millions of properties being bought and kept rather than resold after a few years.The reason they are kept is because capital gains tax is so high that people would rather hold on rather than pay up a huge portion of their gains.And this has nothing to do with interest rates.So rather than clobber the economy with ever-increasing interest rates, why not bring in a policy of variable capital gains tax, so that when prices boom, the tax could be lowered, buy-to letters would sell, the supply of housing increased and prices levelled?The government would actually earn more in cgt despite the lower rate.I have spoken to a few economists about this and there is definitely something in this idea.....what do you think , Evan?

In answer to John's question about the fan chart. The fan charts plot the quarterly averages for the CPI rates. Hence, although March CPI was 3.1%, the Q1 average was 2.9% as shown in the chart.

The obvious problem with inflation, and the BoE's handling of it is house prices. If you use an inflation figure that does not include these, it's no wonder you end up not taking the measures required to tackle price rises.

Interestingly, while not being at all concerned about double digit house price inflation, the BoE backed off rates from 4.75 to 4.5% the moment the housing market showed signs of slowing down.

The BoE have demonstrated again and again that they do not understand the impact massively rising house prices must have on the cost of living, even if it takes some time to filter from the houses (which they don't measure in their index) to other items (which they do).

Next we have the BoE routinely excluding 'volatile' items like fuel and food from their underlying rate and using that as justification for not raising rates. Volatile they may be, but inflationary they certainly are. And as oil prices have shown, to bank on them falling back significantly as the cure to inflation is optimistic at best, and completely delusional at worst. No one knows what might happen to oil prices - they could easily be 100 bucks a barrel in a few weeks depending on events in a few world hotspots.

The BoE needs to get a handle on inflation and the credit bubble. It's too late for painless solutions, but to do nothing will only make things worse later.

Since you start your table (1994) inflation (using RPI for comparability) has never been above 4.2% (and this was shortly before rates peaked at 7.5%). So interest rates are relatively low for this level of inflation and real interest rates are probably the lowest they have ever been (with the exception of the 1970's when inflation was in double digits). The low real rates were supposed to be our dividend from central bank fine tuning. But the genie is out of the bottle now and to control this inflation I would think we would need real rates of at least 3% (roughly what they were from 1994 to 2001) which implies interest rates north of 7%.

Are people ever happy?

The economy continues to grow at a reasonable rate, unemployment in places like Bromsgrove is nil, inflation compared to the early 1980's is still very low and interest rates compared to the early 1990's are low.

Yet, the end is nigh.

If the economy is growing then it's a bad thing because inflation will go up and then interest rates and taxes will need to go up

If there is a recession with nil growth, then its a bad thing so unemployment will go up and public spending will be cut.

When is an economy in a "good" phase?

Hi Evan

Private equity companies are all about fast bucks, tax evasion, and gleaning shed loads of capital off the top margins to support asset stripping, and job losses.They use other peoples money, and for that return mortgage companies to the hilt to pay off debts.When they fail its the tax payer who suffers Rover IS A PRIME EXAMPLE, close it down then later by getting rid of the work force reinvest. easy aint it.

Working, had a Four Bed House, now Divorced, now renting a 2 bed house, no wage rise, house prices way out of my league now, 50 years old, why am I bothering apart from one day the house market will resume to a 'REAL' value where all can afford.
Oh and income taxes, council tax, road tax, carbon tax, pension tax, tax on tax, we as an island are drifting away from maintaining a healthy and equitable establishment. PC not bloody likely....

House prices won't revert to a "real" level whilst people are allowed to own several houses (to rent out, preumably?) - demand will always massively outstrip supply, especially with the working population of the UK increasing.