How is raising interest rates supposed to help with the kind of inflation we are having now?

[Pickman's model]

And a signal box that has only one lever…

in the auld days they had other levers. the supply of money in the economy could be increased or decreased. but now that so much money is notional and 'created' by banks and will never appear in any physical form that's off the table

 

[MickiQ]

And a signal box that has only one lever…

AKA the Bank of England

 

[Smokeandsteam]

Here’s how the BoE expect their interest rate rise to effect disposable income. To remind everyone again, this is the human (and soon to be social) crisis that they have just voted to worsen and deepen to stop something that isn’t happening (wage/price spirals)

 

[not-bono-ever]

Corporations still making bumper profits. It’s as if they are taking advantage of the yeh but oil prices line and adding a bit on top for lols

 

[platinumsage]

Here’s how the BoE expect their interest rate rise to effect disposable income. To remind everyone again, this is the human (and soon to be social) crisis that they have just voted to worsen and deepen to stop something that isn’t happening (wage/price spirals)

View attachment 335962

No that’s not “how the BoE expect their interest rate rise to effect disposable incomes” but their projection for disposable incomes. The contribution of their interest rate measures isn’t shown.

Why do you think inflation won’t become embedded? What did you think about the evidence they presented showing that it has already started to be?

 

[bimble]

what the BOE is doing is almost certainly increasing the depth of the coming recession

So in your opinion they (those people who just voted to do this) must be either stupid or evil or both?

 

[Supine]

Seems as little unfair to blame the BoE at the moment. The financial situation is due to a war they can’t control and a shortage of labour/goods due to brexit which they couldn’t control either. They only have a few levers to pull. The other levers are political.

To say wages doesn’t impact Is also a bit odd. It’s not unusual for labor costs to be 50% of the cost of goods sold.

 

[not-bono-ever]

Ultimately, given the free movement of capital as a given , the BoE has little apart from rates to play with to mitigate shocks. The ole days of currency control and the like are long gone.

 

[Smokeandsteam]

So in your opinion they (those people who just voted to do this) must be either stupid or evil or both?

They aren’t stupid. The BoE have already acknowledged that hiking interest rates won’t prevent inflation rising:

The Bank of England’s War on Workers

The Bank of England's interest rate hike is designed to push the economy into a recession, increase unemployment and restrain wages – forcing workers to pay even more for the cost of living crisis.

tribunemag.co.uk

That fact however does however make their decision stupid. It will also worsen matters as income for ordinary people is already being squeezed beyond breaking point. Falling spending levels will accelerate further deepening and lengthening recession.

What their decision today does indicate however is that the crisis is not solvable by traditional policy levers by the Bank, the Treasury or Ofgem.

What is needed is a) the immediate nationalisation of energy and b) a government bailout package for low and middle earners

 

[Smokeandsteam]

The financial situation is due to a war they can’t control and a shortage of labour/goods due to brexit which they couldn’t control either.

No it isn’t. The main drivers of rising prices are corporate profit/price gouging and non labour input costs mainly raw materials.

 

[Supine]

No it isn’t. The main drivers of rising prices are corporate profit/price gouging and non labour input costs mainly raw materials.

What caused this supposed step change in corporate profits, that occurred about when war started and energy prices went up?

I know there are big profits in some sections of the energy market btw. Caused by countries competing / paying more for energy supply due to the war. You need to get to the root cause to understand the fundamentals of what is causing the issue.

 

[bimble]

What caused it in the 1970s ? It was oil again basically wasn’t it.

 

[8ball]

I think you mean something different to what is usually meant by ‘invest’. You seem to mean, leave your money in the bank, or in some bank-rate based savings account thing. Which yes obvs that’s what it’s supposed to do make people who can save save.
So interest rates going up doesn’t help businesses make more stuff I’m pretty sure. Which is what you were suggesting before.
It makes it harder for them to borrow, and makes people less likely to buy shares instead of leaving their £ in the bank .

People saving stuff is someone else borrowing (unless it goes under the mattress), a lot is Government borrowing ie. Government bonds will produce greater yields.

And when Government borrows, it likes to spend, hopefully on something productive. I don’t know enough economics to know proportions of who (private or Govt) is doing what in each circumstance.

And it’s highly probable I’ve garbled things tbf

 

[Smokeandsteam]

What caused this supposed step change in corporate profits, that occurred about when war started and energy prices went up?

I know there are big profits in some sections of the energy market btw. Caused by countries competing / paying more for energy supply due to the war. You need to get to the root cause to understand the fundamentals of what is causing the issue.

Non labour input costs have gone up and had an effect. But nowhere near the biggest. Corporate profit is responsible for 50-60% of price rises.


From the UK:

https://www.unitetheunion.org/media/4757/unite-investigates-corporate-profiteering-and-the-col-crisis.pdf

From the US

 

[Smokeandsteam]

No that’s not “how the BoE expect their interest rate rise to effect disposable incomes” but their projection for disposable incomes. The contribution of their interest rate measures isn’t shown.

Why do you think inflation won’t become embedded? What did you think about the evidence they presented showing that it has already started to be?

One para 1, that’s useful to know because the effect of their interest rate hike is not going to improve matters is it?

On para 2. I do think inflation might become embedded. I definitely think unemployment will rocket and become embedded (as do the BoE by approx 1 million) to create ‘slack’ and lower inflation (a price worth paying etc) and that the issue we fundamentally face is a crisis of the productive base of the economy and not a financial disturbance. As such interest rate rises are at best irrelevant and at worst will compound the situation by depressing growth and increasing energy and food and absolute poverty

 

[bimble]

What has happened to me I have spent quite a few hours now trying & failing to understand inflation, which used to seem like an incredibly boring sort of a word. My conclusion is that it’s massively complicated and they are all of them just guessing, this being very much not a science. It’s 80% now in turkey, btw.

 

[MickiQ]

they are all of them just guessing

Pretty much this

 

[Elpenor]

What has happened to me I have spent quite a few hours now trying & failing to understand inflation, which used to seem like an incredibly boring sort of a word. My conclusion is that it’s massively complicated and they are all of them just guessing, this being very much not a science. It’s 80% now in turkey, btw.

Has been bad for a while - IIRC at a previous job sometime in 2019 we had to put through an emergency pay review for the Turkish branch office due to the inflation

 

[bimble]

Yep. Causes aren’t going to be the same at all every time there’s inflation but it does look like for most of the time the response by rulers is to do this one thing.

 

[Supine]

What has happened to me I have spent quite a few hours now trying & failing to understand inflation, which used to seem like an incredibly boring sort of a word. My conclusion is that it’s massively complicated and they are all of them just guessing, this being very much not a science. It’s 80% now in turkey, btw.

If it’s any consolation people do three year degrees in the subject and come out realising the same

 

[kabbes]

It’s 80% now in turkey, btw.

And that’s exactly what they’re all terrified of. Once you get to that point, it’s an out of control forest fire that burns everything in its path. Governments will generally do anything to avoid that. Even if all they have is the equivalent of a sledgehammer for fixing a piano. They’d rather destroy the piano then have it played too badly out of tune. Or something. The analogy needs work.

 

[bimble]

yep. At least i can see now that the question at the start was a completely wrong question, the point of raising interest rates has nothing at all to do with trying to make life better and not worse for people who are struggling already, if anyone is supposed to care about that it is not the bank of england, whose remit is simply to get to their target of 2% inflation.

 

[Smokeandsteam]

Spot on. This is class war.

 

[8ball]

What has happened to me I have spent quite a few hours now trying & failing to understand inflation, which used to seem like an incredibly boring sort of a word. My conclusion is that it’s massively complicated and they are all of them just guessing, this being very much not a science. It’s 80% now in turkey, btw.

Quite a few hours on tinternet and still no degree-level understanding of economics!

 

[8ball]

Spot on. This is class war.

Was watching C4 news just now and it didn’t take that much reading between the lines of what the economist was saying to confirm exactly this.

Not so much in terms of austerity, but in terms of using this to ‘correct’ the change in balance of power between employers and employees by claiming that employers chasing recruits is a significant cause of inflation.

 

[kabbes]

I’ve spent the last three months working with some of the most educated people on the topic of economic modelling, and who spend their lives focused on the drivers of different aspects of inflation. Believe me, they also don’t know what’s going to happen. They just have a better articulation of their ignorance.

 

[8ball]

I’ve spent the last three months working with some of the most educated people on the topic of economic modelling, and who spend their lives focused on the drivers of different aspects of inflation. Believe me, they also don’t know what’s going to happen. They just have a better articulation of their ignorance.

If anyone does know what’s going to happen, they’re going to be extremely rich in two years time.

 

[kabbes]

If anyone does know what’s going to happen, they’re going to be extremely rich in two years time.

Ah, well that’s where they’re ahead of the game.

 

[xenon]

Perhaps we can fund tax cuts by slashing the salaries of economic forecasters and economics professors. Just a thought.

 

[Smokeandsteam]

This is an excellent explainer on the stupidity and the disastrous consequences of the BoE interest rate decision. Murphy highlights why the ‘tried and tested’ orthodoxy in terms of controlling inflation is wholly inappropriate in the current circumstances and is designed to tackle a non-existing issue: