How is raising interest rates supposed to help with the kind of inflation we are having now?
- Thread starter bimble
- Start date
platinumsage
HaveMyPassword123
It's pretty vapid stuff tbh. As if taxing the 10% is going to stop Tesco raising it's prices. Completely misrepresents the bank as failing to appreciate that the vast majority of current inflation is due to energy prices. Fails to address any of the domestic indicators e.g. increasing consumer and business inflation expectations, consumer services and pay growth across the economy. It's not just the wealthiest causing inflation.
Yes interest rate rises to combat inflation and which push the country into a recession are grim, but zero percent rates, removing money from the 10% through massive tax increases (even by keeping those receipts out of the economy and not spending it) is not going to combat inflation. When the pound further weakens and inflation keeps going up year after year, the 90% are going to be whole lot worse off for much longer than they are under the current prospect of a typical recessionary period.
It also has to be placed into a context that 1.75% is still staggeringly low in historical terms, and having near-zero risk free rates comes with its own unique set of problems, related to incentivising an unwelcome level of risk taking. Frankly, we probably should never have had such a sustained period of near-zero in the first place, which is why we’re now struggling with the rapid reversals.
Last edited:
Smokeandsteam
Working Class First
You've deliberately mixed up the causes (price rises/inflation) and symptoms (cost of living crisis) in your post. Taxing excess profits, tax increases (and tacking evasion and avoidance) on unearned income and using that money to address food and energy poverty would do little to address the causes but would do a lot to alleviate the symptoms. Raising interest rates will not address the cause and will make the already dire symptoms worse. As Murphy makes clear - and shows in the starkest terms - the problem facing the majority of people in this country is not how to curb their spending, it's the fact that they don't have any money and face generationally unprecedented price rises which will exacerbate the problem. If someone has got no money and can't pay their gas bill what positive effect does whacking up interest rates possibly have?
If the concern of the BoE is to curb the spending of the have's then they should be demanding the Tories introduce the tax measures Murphy calls for. Instead they stay mute as Truss plans to BORROW to CUT TAXES.
Even the BoE disagree with you on 'pay growth' (because pay is falling and is not a factor in inflation), as for your comment on consumer demand the last quarter showed household spending growth increased by 0.6%. What is it you think in that tells you that spending must be curbed? Seriously. You are right about market expectations though. Are you Rishi Sunak?
Smokeandsteam
Working Class First
That is true. But it's also the largest hike for over 20 years, at precisely the wrong time.
platinumsage
HaveMyPassword123
That's got nothing to do with the BoE or with tackling inflation.
You seem to think the main problem associated with inflation is that people won't be able to afford bills this winter. That's a bit like standing in Wuhan in January 2020 and saying the problem with coronavirus is that the local hospital will be soon be full, so we just need to add some extra beds and everything will be fine.
They don't have the authority to demand changes to fiscal policy. You think they should?
So you haven’t read the BoE’s report from yesterday. Probably worth doing that first if you’re going to tout something that is as radical to the global orthodoxy as the cutting of rates to zero to combat inflation:
"Consumer services price inflation picked up to 5.2% in June, its highest rate since March
1993. While some of the rise may reflect the indirect effect of energy price rises, it is also
likely to reflect the strength of nominal pay growth, since labour costs tend to make up a
large proportion of costs for service sector firms. Annual whole-economy average weekly
earnings grew by 6.2% in the three months to May"
Smokeandsteam
Working Class First
Erm, they were points made in Murphy’s tweet thread that I posted and you replied to!That's got nothing to do with the BoE or with tackling inflation.
For around 20 million people paying their bills and feeding their family is the main problem. Immediate action - I’ve outlined the forms this should take - should be the government priority and preventing the BoE from adding to the problem should be part of their response.
As for tackling the underlying causes of inflation - which are corporate profit and non labour input costs - the rate of interest will have absolutely no effect whatsoever on the former and in terms of latter possible some
very negligible effects that even then will take months to work into the system.
Let’s deal with the nonsense in turn:
1. Consumer spending is tanking. Read the ONS report. The increase the BoE has ‘identified’ relate to non discretionary spending, mainly energy bills, food and petrol. You don’t seriously think interest rate hikes should be used to stop this type of spending do you?
2. The BoE is right. Pay - in every sector pay is falling in real terms. Interest rate hikes are normally used when prices and wages are rising in tandem with each one, each mutually reinforcing the other. There is NO economic analysis that I’ve seen that suggests a wages prices spiral.
3. This raises the key question: is there any justification whatsoever - bar ‘what the market expects’ for what the BoE is doing. The answer must be that there isn’t.
Finally, I don’t need to read the report, we’ve got you on here parroting it line by line and without interpretation.
Indeed in the first bit. And I apparently typed “not struggling” when I meant to type “now struggling”.
On the second bit (“precisely the wrong time”), I’d say that’s difficult because they’re now in a no-win situation. Basically, inflation was already looking like it was going to surge anyway before Russia invaded Ukraine. The BoE were assuming that they could delicately manage the rise. Then the energy crisis happened, pouring gallons of semi-literal oil onto the fire. Because inflation was already looking problematic, the BoE were at that point a bit fucked.
Smokeandsteam
Working Class First
Have a read of this too platinumsage
www.newstatesman.com
Only radical solutions can tackle this cost of living emergency
Tinkering with interest rates won’t cut it.
www.newstatesman.com
platinumsage
HaveMyPassword123
Have a read of this too platinumsage
Only radical solutions can tackle this cost of living emergency
Tinkering with interest rates won’t cut it.
You, Murphy and that article are all focusing on current inflation and the cost of living crisis. And on current pay vs current inflation. That's a very different thing to what the bank are focusing on.
"The Bank is offering fantasy economics, in which wage rises are responsible either now or later for prices rising. But with inflation already at 9.1 per cent, and forecast to hit 13 per cent this year, while average wages are predicted to rise by only 4.5 per cent, it obviously cannot be the case that wage rises are driving general inflation. Nor will they, on the Bank’s own forecasts, over the next year In reality, inflation today is the ugly product of two forces. First, instability in the rest of the world, from Russia’s invasion of Ukraine to ongoing Covid restrictions in China, are disrupting the supply of key goods. Second, extreme weather events such as wildfires and droughts, which are worsening over time, are adding their own costs and uncertainties to the mix. Not a single part of this global instability is affected by interest rates or wages in Britain."
No one is claiming that current wage rises are causing current inflation, or will do over the next year. The bank aren't claiming that interest rate rises will combat energy price increases. The problem would be if current wage rises continue after the supply-side inflation has dropped out of the system. Pay growth is expected to be 6% in the near term. Three years of 6% increases will result in pay rising above the 13% inflation shock caused by supply-side issues. Without a concomitant increase in productivity this will likely feed into prices. No one is suggesting this is driving inflation now, the risk is that it may do so. The affect of interest rates on inflation always lags, so the earlier they are raised to tackle nascent core inflation the better - the longer the bank hold off the more heavily they will have to act in future.
It’s worth bearing in mind what other countries have done in recent years too
Everybody put rates to rock bottom in 2008, in a desperate attempt to restimulate demand. It stayed that way until the mid-2010s. Then the Fed (US) did this:
Note how it was gradually ratcheting up rates prior to Covid. Like everybody else, these then dropped to near-zero during lockdown. Look at its more recent response, though - successive 0.75% rises on top of 0.25 and 0.5% rises. People are expecting another 0,75% in September too, which means it will have risen from 0.25% to 3% in the course of something like 5 months.
By contrast, this is the UK:
Look how much more cautious they were already being pre-Covid. And then although they’ve raised rates quickly recently, look how much slower it is than the Fed’s approach.
And this is the effect on exchange rates:
See how during the times in which a gap was growing between the Fed and the BoE, the pound is dropping against the dollar. That latest shift from 1.39 to 1.20 reflects goods priced in dollars being relatively 15% more expensive for people in the UK. That’s a source of inflation right there.
Everybody put rates to rock bottom in 2008, in a desperate attempt to restimulate demand. It stayed that way until the mid-2010s. Then the Fed (US) did this:
Note how it was gradually ratcheting up rates prior to Covid. Like everybody else, these then dropped to near-zero during lockdown. Look at its more recent response, though - successive 0.75% rises on top of 0.25 and 0.5% rises. People are expecting another 0,75% in September too, which means it will have risen from 0.25% to 3% in the course of something like 5 months.
By contrast, this is the UK:
Look how much more cautious they were already being pre-Covid. And then although they’ve raised rates quickly recently, look how much slower it is than the Fed’s approach.
And this is the effect on exchange rates:
See how during the times in which a gap was growing between the Fed and the BoE, the pound is dropping against the dollar. That latest shift from 1.39 to 1.20 reflects goods priced in dollars being relatively 15% more expensive for people in the UK. That’s a source of inflation right there.
Last edited:
not-bono-ever
meh
The actions of the BoE since say 2010 suggest that there was never any confidence that we ever fully escaped the debacle of 08. I always viewed the BoE as shitting themselves to do anything g that might actually expose the structural integrity of the Brit economy. We have been fucked since 08
brogdale
Coming to terms with late onset Anarchism
Thatcherite playbook; tighten monetary policy to cause recession and unemployment to accelerate wage decline to lower effective demand and lower inflation. The political logic being that everyone (including their base) is adversely affected by inflation, whereas the unemployed will tend not to vote or vote for opposition parties.
Smokeandsteam
Working Class First
Inflation up to 10.1% today (higher than the forecast rise:
There were some on here arguing that interest rate rises were necessary. Here is the evidence that they are worse than useless. The equivalent of burning your house down to stop it flooding.
Government action is needed to freeze energy price and increase public sector pay, pensions and benefits by inflation.
There were some on here arguing that interest rate rises were necessary. Here is the evidence that they are worse than useless. The equivalent of burning your house down to stop it flooding.
Government action is needed to freeze energy price and increase public sector pay, pensions and benefits by inflation.
platinumsage
HaveMyPassword123
That's like saying after a hot day: "some on here arguing that CO2 cuts were necessary. Here is the evidence that they are worse than useless."
Smokeandsteam
Working Class First
It’s really not. That inflation has risen is not a surprise. It’s the fact that it’s risen faster than predicted indicating that at best the rise is useless.
brogdale
Coming to terms with late onset Anarchism
If the tories' see their only anti-inflationary lever as recession, immiserisation and eventual rising unemployment, then the rate rises are far from useless.
platinumsage
HaveMyPassword123
If you think the current Tory fiscal regime and the BoE’s 1.75% interest rates are extreme rather than extremely timid then check out the sort of stuff that Thatcher would probably be pursuing today:
Rates at 13.5% and a temporary abolition of capital gains tax and VAT
brogdale
Coming to terms with late onset Anarchism
bimble
floofy
The pork thing, pig world has the answer, it’s the cost of feed, means the pig farmers aren’t making any money.
www.pig-world.co.uk
Producers losing up to £61/pig, as costs soar beyond £2/kg | Pig World
Pig producers are currently losing, on average, between £46 and £61 per slaughter pig, with costs of production typically above the £2/kg mark, according to
kenny g
Sheeple Awake!
has a pretty dismissive approach towards high interest rates resolving much. I can see force in the argument that high rates clears out bad companies but having witnessed good manufacturing business being wiped out in thatchers time it would seem better to actually do positive things
Last edited:
bimble
floofy
That says that the cause of the inflation is people having too much money.
So he blames furlough. Not Putin etc. That’s just nonsense isn’t it, if that’s the diagnosis I don’t think the treatments going to be much good.
Storm Fox
Trying the find the next noun to verb
It is also to do with Shipping Container rates, which according to the Storm Vixen have gone from $2,000 to $20,000 for certain routes.
There is also an electrical component shortage. Some of the components have a >52week lead time. This is leading to our company having to redesign hardware to use available parts. Which then pushes up the price.
That is just two companies one in the food sector and one in software / hardware.
DaveCinzano
WATCH OUT, GEORGE, HE'S GOT A SCREWDRIVER!
bimble
floofy
Well, yes. It’s not ‘people have too much money”.
Smokeandsteam
Working Class First
Your comparison is totally misleading. Thatcher faced, from her perspective, the problem of the organized working class that was able to effectively leverage pay awards that, by and large, kept pace with the costs of living. The Tories had tried to take this on under Heath in 1972 and 1974 and were defeated by the Miners. The infamous phrase of the early 1980's that 'unemployment was a price worth paying' had a triple meaning:
- Thatcher and the Tories wanted the inflation rate to become the key economic metric rather than growth which had been the key measure for the previous 30 years. Under the new narrative controlling inflation was more important that the economy growing.
- 'controlling inflation' was code for taking on and defeating the organized working class.
- At that point in time - 1979/80 - there was a wages-prices spiral
None of those factor apply today. Inflation is rising purely because of corporate profit and non Labour input costs. There is no disposable income spending by ordinary people to reign in via interest rate rises. More money is being spent, yes, but, on energy, food and transport. Discretionary spending is limited to an affluent minority and, in a sane world, would be addressed through taxation.
The only similarity with then and now in fact is that Thatcher and the BOE/Truss will knowingly create and deepen the recession and ensure that standards of living are permanently lowered, as what we can for certain is that 'once' recovery;' arrives it will not be the previous levels.
platinumsage
HaveMyPassword123
Rates take a year or more to impact inflation figures, so the only thing it demonstrates is that rates could arguably have been raised higher earlier than they have been. You're also still not grasping the fact that rate rises are not intended to negate supply-side shocks.
I wasn't comparing anything, simply demonstrating that current policy is long way short of where Thatcher's Hayek-fandom would have led her today.
Smokeandsteam
Working Class First
The BoE report, which you love mentioning as though it holds some deeper and profound analysis states:
“In view of continuing signs of robust cost and price pressures, including the current tightness of the labour market, and the risk that those pressures become more persistent, the Committee voted to increase Bank Rate by 0.25 percentage points, to 1.25%, at this meeting”.
Fast forward, and costs and prices are continuing rise and at a rate faster than BoE/OBR forecasts.
You were comparing. And, as usual, in a way that reveals that you don’t really understand what’s happening now or what happened then. Sure, you know the figures and what those responsible say, but your still not grasping that what they say is bollocks and/or dissembling on behalf of the 1%
Similar threads
