Inflation vs Deflation

[montmorencyt2w]

http://www.bbc.co.uk/news/business-12214546

Well who would have guessed? :-0


US to follow on course but perhaps with lag +2 quarters...

And core inflation, which strips out volatile items such as energy and food prices, rose from 2.7% to 2.9%.

That may be the definition, but what sort of "core inflation" would leave out energy and food costs? Makes no sense to me.

 

[TheBramble]

That may be the definition, but what sort of "core inflation" would leave out energy and food costs? Makes no sense to me.

The sort of 'core inflation' that the government doesn't want to be unnecessarily large.

Like taking 'discouraged workers' off the unemployment count.

 

[0007]

The sort of 'core inflation' that the government doesn't want to be unnecessarily large.

Like taking 'discouraged workers' off the unemployment count.

Meanwhile true inflation will effectively reduce government debt. So much easier than getting the punters to face up to the truth.

 

[TheBramble]

That's the way I'd do it.

 

[meanreversion]

Meanwhile true inflation will effectively reduce government debt. So much easier than getting the punters to face up to the truth.

Don't forget that a third of all gilts are index linked, as are most public sector pension liabilities, so inflation isn't quite the quick cure that you imagine.

The UK is perhaps the first western country about to enter a protracted period of declining living standards. Let's say the MPC raise rates to 10% overnight.. maybe the pound goes up a few percent, but the price of commodities we import has been going up by 10, 20, 30%.. i.e. raising interest rates doesn't solve anything.

Typically in the past rates have been raised when wage settlements are getting too heated and amidst excessive credit availability. Well guess what, this time round wage settlements are subdued, and people are finding it very hard to come by credit.

Raising interest rates solves nothing, IMO. If workers are prepared to continue accepting sub-inflation pay increases (because they're worried about their jobs), then all this inflation means is a gradual lowering of living standards. And when you consider how Labour f***ed the economy and the education system over the last 13 years, it's no more than we deserve.

 

[Atilla]

Don't forget that a third of all gilts are index linked, as are most public sector pension liabilities, so inflation isn't quite the quick cure that you imagine.

The UK is perhaps the first western country about to enter a protracted period of declining living standards. Let's say the MPC raise rates to 10% overnight.. maybe the pound goes up a few percent, but the price of commodities we import has been going up by 10, 20, 30%.. i.e. raising interest rates doesn't solve anything.

Typically in the past rates have been raised when wage settlements are getting too heated and amidst excessive credit availability. Well guess what, this time round wage settlements are subdued, and people are finding it very hard to come by credit.

Raising interest rates solves nothing, IMO. If workers are prepared to continue accepting sub-inflation pay increases (because they're worried about their jobs), then all this inflation means is a gradual lowering of living standards. And when you consider how Labour f***ed the economy and the education system over the last 13 years, it's no more than we deserve.

The government doesn't want you to live forever if you can not look after your own self.

Right now all governments are playing chicken with inflation, interest rates and exchange rates.

Who will raise rates first to fight off inflation and have imports / export go against trying to come out of this recession.

Also inflation stimulates production and good for manufacturers profits as stocks purchased in time t-2 is sold for greater margins when t+1 the finished product is sold.

As also pointed out inflation erodes debt.


Inflation is government policy for most governments right now - especially those in debt. Next move BoP surplus countries.

China steps up to the world stage... clap clap clap :clap:

 

[ducati998]

Atilla

A

lso inflation stimulates production and good for manufacturers profits as stocks purchased in time t-2 is sold for greater margins when t+1 the finished product is sold.

Inflation, or money and credit expansion, can stimulate production, via the implementation of higher stages of production: this however is the boom phase, and the credit expansion must continue, indefinitely, or, the boom turns to a bust.

The reason being that consumer time preferences have not altered. The capital required to lower the nominal interest rates, although not the pure rate of interest, is supplied via bank credit expansion, and/or fiscal deficit spending. Currently, we have both.

As to corporate profits, this depends largely on their accounting system: FIFO will result in as you say, rising profit margins in an inflationary environment. A good example of this is CENX

jog on
duc

 

[Atilla]

Atilla

A


Inflation, or money and credit expansion, can stimulate production, via the implementation of higher stages of production?: this however is the boom phase, and the credit expansion must continue, indefinitely, or, the boom turns to a bust.

The reason being that consumer time preferences have not altered?. The capital required to lower the nominal interest rates, although not the pure rate of interest, is supplied via bank credit expansion, and/or fiscal deficit spending. Currently, we have both. ????

As to corporate profits, this depends largely on their accounting system: LIFO will result in as you say, rising profit margins in an inflationary environment. A good example of this is CENX ????

jog on
duc

Hi Duc, not sure I understand these terms or what they are or mean???

Sorry must be getting old and out of touch with these new mumbo jumbo jargon...

 

[Pazienza]

That's the way I'd do it.

No better way.

 

[Pazienza]

Don't forget that a third of all gilts are index linked, as are most public sector pension liabilities, so inflation isn't quite the quick cure that you imagine.

You have to put it properly on gilts (buyers aren't that f***ing daft after all), so that will keep climbing regardless. But I think you'll find the indexing on pensions is capped - it varies, but around 3%, 5% etc is quite common I believe. Not hard to nudge inflation into profitable territory.

So what we really need is some double digit inflation, or better yet - hyper inflation!

 

[Atilla]

You have to put it properly on gilts (buyers aren't that f***ing daft after all), so that will keep climbing regardless. But I think you'll find the indexing on pensions is capped - it varies, but around 3%, 5% etc is quite common I believe. Not hard to nudge inflation into profitable territory.

So what we really need is some double digit inflation, or better yet - hyper inflation!

What we need is negative real rates of interest.

Not sure about double digit inflation. Single rates should do the job.

Nobody wants to hyperventilate as symptoms can be discomforting...

 

[Martinghoul]

What we need is negative real rates of interest.

Not sure about double digit inflation. Single rates should do the job.

Nobody wants to hyperventilate as symptoms can be discomforting...

Well, Merv is giving you negative real rates aplenty, that's for sure... Where do you think real rates are at the moment?

And yes, indexation of most, if not all, defined benefit schemes in the UK is capped at 5%. But it's true inflation isn't the cure for the UK. However, there are other "measures" that do provide a cure, e.g. the transition to AER for RPI calculations, the conversion of indexation from RPI to CPI, etc. Basically, pensioners' standard of living needs to fall and it's all about finding creative ways of achieving that goal.

 

[Atilla]

Well, Merv is giving you negative real rates aplenty, that's for sure... Where do you think real rates are at the moment?

And yes, indexation of most, if not all, defined benefit schemes in the UK are capped at 5%.

I'd guess around -4.5% excluding exchange rate consideration

Inflation is a cure - beg to differ. It is also government policy whether it is owned up to it or not. How else can one explain 6 months + periods of breaching the target rate of inflation.

Yeah we know target is off-side as the BoE writes in their letter to Mr Chancellor - just adjust the scope settings to compensate for wind factor... No idea why they still go on about their 2% target. It's totally surreal but hey it makes for good story telling as it is not easy to waffle for 10 minutes every month...

 

[scose-no-doubt]

Basically, pensioners' standard of living needs to fall and it's all about finding creative ways of achieving that goal.

I stll say war or pandemic to come.

 

[zsawevv212]

As the saying goes, it's the market's job to fool as many people as possible, and it's doing so once again. Most people weighing inflation vs. deflation are still focused on the wrong enemy. The mistaken focus on inflation in the face of obvious signs of deflation is due to the human tendency to project the future linearly, not cyclically.

 

[ducati998]

As the saying goes, it's the market's job to fool as many people as possible, and it's doing so once again. Most people weighing inflation vs. deflation are still focused on the wrong enemy. The mistaken focus on inflation in the face of obvious signs of deflation is due to the human tendency to project the future linearly, not cyclically.

What obvious signs of deflation?
What timeframe?

jog on
duc

 

[Atilla]

What obvious signs of deflation?
What timeframe?

jog on
duc

Well I must confess US has approximated to deflation and UK inflation.

My thoughts are that the US is lagging this time due to their unique market circumstances in contrast to other countries. ie Excess housing supply and food.

In the UK it is a different story of shortage of housing and dependance on food imports.

There is also more significant changes in the basket of goods. Food and energy prices rising whilst manufactured goods and electronics etc falling.

Increasingly inflation is hocus pocus statistics these days....


However, given money input and reduced output - it will inevitably lead to higher inflation in due course. These differences are to do with QE and what the transmission mechanism is into the real economy which has perplexed me. Still do not understand it...

 

[meanreversion]

It's all a Ponzi scheme.

(This is my variation of Godwin's Law)

 

[scose-no-doubt]

These differences are to do with QE and what the transmission mechanism is into the real economy which has perplexed me. Still do not understand it...

Bank bonus spends? Higher bank profits in order to have recent taxable losses written off more quickly to bring forward taxation revenues from the financial sector?

Bank capitalisation in preparation for basel 3 so that we can have more of the same pre crisis banking operations in the years to come?

Low rates as increase in disposable income for single home owners?

Low rates helping buoy BTL owners and stop more bankruptcies/write-offs?

Negative real rates as disincentive to hoard? Higher NPV and IRR b/e levels leading healthy businesses to seek yield creating economic activity?

je ne suis pas une economiste mei je peu voir quelle que chose la

 

[meanreversion]

I wonder if we'll ever see a borrowing number which surprises on the good side. I just can't get over how far off these forecasts are. For November, borrowing was meant to be £17bn, and it came in at £23bn. The inflation forecast yesterday was 0.4% below the actual number, etc.

Is it really that hard?