Any (post 2008) Economists in the house? - Inflation.

[Terry - Somerset]

UK post pandemic period may not be recessionary, although inflation is uncertain.

Many EU citizens will have left the UK either due to Brexit or the pandemic encouraging a return to family and roots. This is evidenced by job vacancies at the highest level for many years - a possibly unexpected outcome!.

For some the pandemic has allowed increased savings - work from home, avoiding commuting costs, unable to spend on travel, hospitality, entertainment all contributed. This group will have these savings at their disposal as normality returns.

For those furloughed on lower incomes, many will have saved little. Fortunately concerns about longer term employment prospects may be improved with the high level of vacancies.

Many self employed may have struggled during the pandemic - although their earning prospects are now reasonable.

It would be complacent to assume the UK is without problems:

• skills shortages - HGV drivers are an example - also evident in building trades (plumbers, bricklayers, electricians) and hospitality (coffee bars, hotels, restaurants)
• the ease with which all sectors of the economy were able recruit already skilled staff from overseas has reduced UK training capability.
• bizarrely current rules mean that skilled people may still be recruited from EU - but not lower skilled low paid jobs. I assume they are reserved for UK residents.

The pandemic has changed behaviours and attitudes - work from home, social care, vulnerable supply chains etc. It is not clear how permanent or how quickly this may change.

Short term there are clearly inflationary pressures due to pandemic dislocation of supply chains reducing supply of goods, whilst demand is likely increasing.

What is not clear is whether this is a temporary pressure, or will be allowed to persist in the longer term as borrowings taken on by government and business will be easier to repay in real terms with moderate inflation.

 

[Jameshow]

Hello James - I don't understand what you are saying. Can you expand please? This is from landregistry.data.gov.uk today. I see no house price deflation post 2008/9 recession.

(Trying to stay 100% laser focussed on my OP question about huge inflationary private sector raw material costs, worldwide, not UK only).

View attachment 118747

These is a dip in the graph to posted from 2008 - 2010!

House prices fall by 40k.

Cheers James

 

[TominDales]

As a novice central banker, still struggling to understand how it all works, here goes...

Inflation is a function of supply and demand, specifically the demand for money.

Worldwide inflation is increasing because there is a lot of money in the system which is outstripping the supply of goods. As prices go up the demand for money increases, which the central bank will supply until inflation reaches the target level.

At that point the Central Bank will restrict the supply of money, causing higher interest rates and suppressing the demand for money.

The intent - rarely achieved - is to yo-yo around the target inflation rate like a Goldilocks zone, never too got and never too cold.
Unfortunately people are complicated and rarely cooperate with the Cental Bankers...lol

I would have thought the driver is a sudden drop in supply of goods, that has got things out of kilter. Gas prices are rising because gas is in short supply with maintenance of equipment due in 2019/20 has had to be postponed and added to the 2021 workloads so capacity is down. Its also down because it suits some producers to keep the market tight. Normally demand falls because of economic factors - rescission and so supply falls. with the pandemic demand fell for unique reasons, there was still latent pent up demand and cheap money continued to be supplied by governments. So in your function demand has exceeded supply, but the real cause was a sudden drop in supply followed by a slow resumption whereas demand bounced back much faster.

I have a question for a proper economist. In normal circumstances governments and central bankers will raise interest rates to quell inflation. However if we have a sudden rise and tough economic times ie stagflation, do you think the authorities would take the political risk to clamp down hard on inflation, or do you think they will live with it for a few years and hope that surging production in China over time will provide a natural deflationary effect on global prices as happened in the 2000s. Thanks

 

[TominDales]

Some thoughts from a depressed pessimist: ymmv

During times of inflation asset prices rise faster than wages, benefiting asset owners at the expense of wage earners. During deflation the reverse happens.

In other words, deflation will be fought tooth and nail, because the owners of assets stand to lose more in deflation that the earners of wages, and asset owners make the rules.

I don't think that is the full picture. My reading of history is that deflation is horrible for everyone, with deflation the value of money increases, this means that debts become impossible to replay because assets and wages cant re-pay the debt. Mortgages become impossible to re-pay, the collateral property becomes less valuable - negative equity, so loads of people go bankrupt, that causes a further drop in demand, that feeds a vicious cycle of deflation. I've read contemporary accounts of deflation say it is terrifying for all, especially for the less well of and those in some form of debt.

Wage inflation did keep pace with asset inflation in the 1960s and 1970 into the 1980s in the uk, as labour productivity grew fast. The problem these days is globalisation and move away from collective industries has created weak conditions for pay bargaining, so assets have won out, especially those in low supply such as housing. Also quantitative easing disproportionately benefited financial assets at a time when the fear of recession supressed pay bargaining. Right now in post brexit Brittan there is a chance to get some pay leverage back, not just in haulage but other manual industries.

 

[WillM]

An alternative point of view in the case of Craig Murray would be that the victim of an alleged sex crime had the right not to have her identity exposed. Perhaps I'm being gullible in believing that ... or you are sticking up for a mate as per your tag line ... didn't Murray also try to claim that the pictures of the Russians who carried out the nerve agent attack in Salisbury were dodgy?

A sex crime that was not proven, where other journalists did far more of a jigsaw identification, and where Murray was the only journalist ever to be jailed for such an offence. He’s was jailed, like Assange, as punishment for letting the public know the truth. In fact, his accounts of the Assange trial, the most important UK trial in a century but virtually unreported in the press, are superb.

 

[jcassidy]

I have a question for a proper economist. In normal circumstances governments and central bankers will raise interest rates to quell inflation. However if we have a sudden rise and tough economic times ie stagflation, do you think the authorities would take the political risk to clamp down hard on inflation, or do you think they will live with it for a few years and hope that surging production in China over time will provide a natural deflationary effect on global prices as happened in the 2000s. Thanks

Well I for one am not a proper economist, more of an IT guy who somehow ended up in the business...

However, you should note that both the US Federal Reserve and the ECB have amended their inflation objectives.

Previously the ECB wanted to keep inflation "below but close to 2%", whereas now it's target is 2% over the medium term.

In practical terms, this means that the ECB will not react to inflation nearing or over 2%, given that the last decade has seen inflation below that target. What does "medium term" mean? It means whatever the ECB want it to mean.

The US Fed has adopted a similar policy, based on it's dual mandate of managing inflation and promoting employment - essentially the Fed says, if inflation is at our target, but there is untapped labour reserves, we won't move on inflation until the unemployment number is lower.

(Typically speaking, the last people to benefit from an economic upturn are marginalised and minority communities with high long-term unemployment rates, and the Fed has a new theory that raising rates as usual means that these sectors never benefit from the upturn, as the economy has been cooled before the labour pools contract sufficiently to provide jobs for these sectors. THerefore letting the economy overheat a little - via higher inflation - should provide these crucial jobs)

Monetary Policy is not a political decision, although the US Fed and the UK Bank of England are both more sensitive to politics than the ECB is[1].

In fact, the US Fed repeatedly raised interest rates in 1994 which royally p***ed off Bill Clinton, who saw it as strangling his economic recovery plans - which to be fair it probably did a bit. The Fed probably wouldn't make that move today.

So in short, yes, the central banks will tolerate higher inflation 'over the medium term' as the current theory is that raising rates too soon is a Bad Idea.

[1] The ECB, although it touts its independence and regularly tells the European Parliament to get lost, rarely acts without an eye on domestic French and German politics. Hello, Greece? Clusterf**k driven by domestic politics in other EU states...

@TominDales I think he means this one? here or this one. It's weirdly gratifying that someone found one of my musings useful!

 

[WillM]

My 2c is Assange has gotten what was coming for him, and Murray very conscientiously and deliberately engaged in contempt of court.

It’s clear your 2C is not based on facts. The US chief witness against A has recently been recorded saying he made up his testimony, and the latest news is that the CIA has planned assassination attempts against A whilst an asylum seeker in the embassy - which significantly undermines the US position that A would be safe in US supermax. As safe as Epstein I suppose, who was murdered because he *did* work for US intelligence.

 

[TominDales]

Well I for one am not a proper economist, more of an IT guy who somehow ended up in the business...

However, you should note that both the US Federal Reserve and the ECB have amended their inflation objectives.

Previously the ECB wanted to keep inflation "below but close to 2%", whereas now it's target is 2% over the medium term.

In practical terms, this means that the ECB will not react to inflation nearing or over 2%, given that the last decade has seen inflation below that target. What does "medium term" mean? It means whatever the ECB want it to mean.

The US Fed has adopted a similar policy, based on it's dual mandate of managing inflation and promoting employment - essentially the Fed says, if inflation is at our target, but there is untapped labour reserves, we won't move on inflation until the unemployment number is lower.

(Typically speaking, the last people to benefit from an economic upturn are marginalised and minority communities with high long-term unemployment rates, and the Fed has a new theory that raising rates as usual means that these sectors never benefit from the upturn, as the economy has been cooled before the labour pools contract sufficiently to provide jobs for these sectors. THerefore letting the economy overheat a little - via higher inflation - should provide these crucial jobs)

Monetary Policy is not a political decision, although the US Fed and the UK Bank of England are both more sensitive to politics than the ECB is[1].

In fact, the US Fed repeatedly raised interest rates in 1994 which royally p***ed off Bill Clinton, who saw it as strangling his economic recovery plans - which to be fair it probably did a bit. The Fed probably wouldn't make that move today.

So in short, yes, the central banks will tolerate higher inflation 'over the medium term' as the current theory is that raising rates too soon is a Bad Idea.

[1] The ECB, although it touts its independence and regularly tells the European Parliament to get lost, rarely acts without an eye on domestic French and German politics. Hello, Greece? Clusterf**k driven by domestic politics in other EU states...

@TominDales I think he means this one? here or this one. It's weirdly gratifying that someone found one of my musings useful!

Thanks for the explanation. Although since becoming independent central banks have quelled inflation, they had it easy whist China was increasing labour at a phenomenal rate. I don't think they are fully immune to political sentiment, ok they have quelled the knee jerk treasury actions of the 70's and 80's where rates were adjusted to suit forthcoming elections, but I detect they are ac cutely aware of how the poorest suffer - your interesting comments about the Fed's view of marginalised communities seems to bear that out. The ECB isn't as independent as the Bundesbank was. I suspect Sunak has chosen someone he can influence at the BoE. However there is a big difference between influencing a separate institution and actually having the power to mint money in the treasury - it probably suits the chancellors that they can blame someone else for austerity. It must pee off smaller EU states that get lectured on fiscal riotousness, but if France or Germany need a bit of slack they get it.

 

[Trainee neophyte]

I don't think that is the full picture. My reading of history is that deflation is horrible for everyone,

Thankyou for your thoughtful, nuanced reply to my sweeping statements. I would note that your list of people suffering through deflation doesn't include savers or people living on fixed incomes - most notably pensioners. Both these groups are royally shafted by the endless, constant inflation which actually constitutes theft of their assets. Inflation doesn't need to happen, but is endemic and endless and entirely done on purpose. What is the long term purchasing power of a pound over time? A pound today is worth 4% of a pound in 1960. The only reason there aren't riots about this is because it happens gradually.

This constant devaluing of the currency is not because of shortages or increased demand - it is a carefully crafted, fully intentional destruction of wealth over generations for the benefit of...?

 

[Jacob]

....

This constant devaluing of the currency is not because of shortages or increased demand - it is a carefully crafted, fully intentional destruction of wealth over generations for the benefit of...?

For the benefit of owners of property and capital. Wealth distribution has gone steadily from the poor to the rich for some time and probably be the reverse of your graph.

 

[jcassidy]

You both write as if inflation is a new thing invented by modern capitalists. The same arguments against inflation are in the Bible - something about unequal weights and measures beings an abomination to the Lord, and probably lots of other stuff. 'Your gold has turned to dross and your wine to water' or something.

Be it right or not, it's been around for a long time and probably will be until we transistion to some sort of sufficient-for-all model like Gene Rodenberry wrote about (Star Trek).

 

[D_W]

For the benefit of owners of property and capital. Wealth distribution has gone steadily from the poor to the rich for some time and probably be the reverse of your graph.

You haven't noticed any change in habits of the poor (spending, entitlement, devices, etc)?

 

[D_W]

You both write as if inflation is a new thing invented by modern capitalists. The same arguments against inflation are in the Bible - something about unequal weights and measures beings an abomination to the Lord, and probably lots of other stuff. 'Your gold has turned to dross and your wine to water' or something.

Be it right or not, it's been around for a long time and probably will be until we transistion to some sort of sufficient-for-all model like Gene Rodenberry wrote about (Star Trek).

As long as people will save money and keep it outside of the system if it doesn't lose value, we will have inflation. The change now is that the government has found the ability to keep debt rates low while inflation increases. In the US, the government retirement benefits are indexed to inflation, though, so that side will increase close to in line with staple living costs. Yard sales and flea markets are still loaded with gobs of usable stuff here that's worth almost nothing (when I was a kid, that wasn't the case - clothes were still made here in large amounts, and a lot of consumer goods were made domestically and were relatively expensive - the used market was pretty strong because there wasn't anything cheap and easy on the new market). maybe we'll get back to a place where people aren't just thoughtlessly throwing away stuff.

At any rate, a key underlying item here is that if bond rates remain low, the interest expense on government debt will remain low with it and everyone will continue to look the other way. Wages are a trailing indicator, so there will be some temporary pressure there.

 

[Jacob]

https://equalitytrust.org.uk/scale-economic-inequality-uk

 

[D_W]

https://equalitytrust.org.uk/scale-economic-inequality-uk

so, they get benefits (probably housing, food, health care, utilities) and don't have much income. How do they live? Aside from the truly disabled, I'd bet that most of the bottom fifth are worse off for not having direction and purpose than they are for staples of living.

 

[RobinBHM]

Thankyou for your thoughtful, nuanced reply to my sweeping statements. I would note that your list of people suffering through deflation doesn't include savers or people living on fixed incomes - most notably pensioners. Both these groups are royally shafted by the endless, constant inflation which actually constitutes theft of their assets. Inflation doesn't need to happen, but is endemic and endless and entirely done on purpose. What is the long term purchasing power of a pound over time? A pound today is worth 4% of a pound in 1960. The only reason there aren't riots about this is because it happens gradually.

This constant devaluing of the currency is not because of shortages or increased demand - it is a carefully crafted, fully intentional destruction of wealth over generations for the benefit of...?

I’m sorry, I don’t understand the point you are making.

are Pensions fixed income?

the state pension increases roughly in line with inflation.

and those better off with private pensions probably own a house….not much asset theft there.

 

[RobinBHM]

so, they get benefits (probably housing, food, health care, utilities) and don't have much income. How do they live? Aside from the truly disabled, I'd bet that most of the bottom fifth are worse off for not having direction and purpose than they are for staples of living.

I wonder if the poorest in society are more feckless than those who are richer. I’m not sure they are.

Im also not sure most people on benefits are lazy or in that situation of their own choice.

Domestic violence
disfunctional family upbringing
drug addiction
alcohol addiction
mental health

are primary causes.

 

[RobinBHM]

https://equalitytrust.org.uk/scale-economic-inequality-uk

It’s quite shocking really.

and we are getting more like America every year.

 

[D_W]

I wonder if the poorest in society are more feckless than those who are richer. I’m not sure they are.

Im also not sure most people on benefits are lazy or in that situation of their own choice.

Domestic violence
disfunctional family upbringing
drug addiction
alcohol addiction
mental health

are primary causes.

some are, some are not. That's what makes the situation difficult to sort out, because reality never fits a partisan simplified argument. it doesn't fit a "vintage republican" sink or swim argument (some people will never survive on their own because they are dealt cards that prevent it or they don't have the aptitude), and it doesn't fit the Jacob argument on the other end, that somehow people will be noble and put forth lots of effort and corporations won't leave when you give them a lazy unmotivated workforce.

One of my favorite shows here is Roseanne, because it shows people I recognize from my youth. Roseanne said in an interview that one of the things she wanted to do was show that poor people, and poor and fat people, aren't stupid. My grandparents were that - they didn't finish school (common for farmers), would be considered backwards by many now, but were industrious and proud and refused public benefits above and beyond subsidized programs given to all farmers in the US. One they were absolutely not is feckless, and they ended pushing anything they could save forward, ultimately accumulating 330 acres by "lying in wait" for the right time to buy, and save.

Another friend of mine lived in a house with four kids, the dad drove as a delivery driver and the mother bred exotic birds. I doubt their combined income put them much above the poverty level, but they didn't waste any money. it's also true that at that time (35 years ago, and closer to 90 years ago for my grandparents starting out), it wasn't as easy to get benefits. The number of social safety net programs in the US, and the sometimes sideways guidance, has exploded.

I didn't know the class warfare language that Jacob likes to rely on when I was young, my parents were both teachers, and they saved like disaster was coming next and I thought we were poor (and was indifferent about it other than getting pissed now and again that I could never get regular clothes off the rack at a store - they came from yardsales or the "irregular" rack). I thought my grandparents were interesting, and the same with my friend's parents - in his case, even though the parents had little money, they used it to buy land in the boonies and it was a fun place. They weren't stupid. Their house was small, and his parents slept in the living room for as long as I can remember.

All four of the boys are employed now, and two are electrical engineers.

(i'm sure on average at least most of the things you mention are higher among the poor. If where you are tomorrow doesn't matter, then it's hard to make good decisions today, and the unemployable folks with mental health issues (severe bipolar, schizophrenia, etc), there's no way around keeping them cared for first and worrying about whether or not they can find purpose second - they have to be accomodated to make sure they're safe).

 

[Jameshow]

I wonder if the poorest in society are more feckless than those who are richer. I’m not sure they are.

Im also not sure most people on benefits are lazy or in that situation of their own choice.

Domestic violence
disfunctional family upbringing
drug addiction
alcohol addiction
mental health

are primary causes.

Yeap you have summed up my social prescribing workload in a typical northern town.

Cheers James