Inflation

[superfrank]

Andrew Sentance is the only person on that committee with any credibility - and he is to be replaced by a Goldman Sachs banker. No prizes for guessing which way he'll be voting.

Surprise surprise!

New Bank of England member votes to keep rates on hold
http://www.bbc.co.uk/news/business-13871449

Sterling trade-weighted index drops to 8-mth low
http://uk.reuters.com/article/2011/06/2 ... TH20110622

Sterling fell to its lowest in eight months against a currency basket on Wednesday, as the UK currency fell broadly after Bank of England minutes showed policymakers were concerned about the growth outlook and some believed more monetary stimulus may be needed.

money printing = lower sterling = higher import prices = lower demand = money printing = lower sterling = higher import prices = lower demand = money printing = lower sterling = higher import prices = lower demand = money printing = lower sterling = higher import prices = lower demand = money printing = lower sterling = higher import prices = lower demand = money printing = lower sterling = higher import prices = lower demand = money printing = lower sterling = higher import prices = lower demand = money printing = lower sterling = higher import prices = lower demand = money printing = lower sterling = higher import prices = lower demand...

[Iron]

Oil has been falling nicely since the start of May. Has anyone noticed a difference at the pump?

Jeff

[superfrank]

BIS warns low rates may create 'financial distortions'
http://www.bbc.co.uk/news/business-13922857

"The prolonged period of very low interest rates entails the risk of creating serious financial distortions, misallocations of resources and delay in the necessary deleveraging in those advanced countries most affected by the crisis," the bank said in its annual report.

"All financial crises, especially those generated by a credit-fuelled property price boom, leave long-lasting wreckage," the bank said.

I'm sure it will be ignored by the FED, BoE, ECB etc., because it's not what they want to hear, but at least some people are talking sense.

[Iron]

UK CPI inflation in surprise fall to 4.2% in June - http://www.bbc.co.uk/news/business-14119532

I'm sure this will be music to Mr King's ears...

Jeff

[Iron]

Inflation spike looms closer but no interest rate rise, Bank of England minutes show: http://www.telegraph.co.uk/finance/econ ... -show.html

*puts head in hands*

Will inflation have to reach double digits before Mr King decides to do his job?!?

Jeff

[superfrank]

Euler says that Buffet taught him not to worry about the future because you can't predict what's gonna happen.

But on the BoE I'm happy to make a prediction...
CPI will be above target for the next 5 years and base rates won't go above 1% in that time.

Things will only change if the bond markets call their bluff.

[Iron]

I'm not so sure...

There may come a point when bond buyers say to King: 'Inflation means that a £1000 bond will be worth £950 or less in a year's time. So why on earth should I buy your bonds, when you're offering nearly 0% interest!?! Come on mate, be serious, you're having a larf!'.

That may force King to raise interest rates. Ditto if the US raises its interest rates, although that doesn't seem likely, as Bernanke seems to see printing money as a cure for every economic woe known to man!

Jeff

[superfrank]

Gilts typically have a long maturity compared the debt of other governments.

According to wiki 25% of gilts are index-linked.
http://en.wikipedia.org/wiki/Gilt-edged_securities

[Iron]

True, although surely such gilts mean that, if inflation is rising, then so do the B and E's own borrowing costs. And if the B of E faces a higher cost of borrowing, the only way it will avoid taking a hit is if it raises the interest rate it charges banks.

Jeff

According to wiki 25% of gilts are index-linked.
http://en.wikipedia.org/wiki/Gilt-edged_securities

[superfrank]

but then the BoE just buys the debt itself (i.e. prints money and debases the currency).

low interest rates are just another bailout (of banks to sort out their balance sheets, and of debtors to support asset prices).

[Iron]

They could, although they might be opening the gates of Hell if they printed money just to avoid having to raise interest rates! That's not to say they wouldn't though!

Jeff

but then the BoE just buys the debt itself (i.e. prints money and debases the currency).

[Iron]

From http://www.bbc.co.uk/news/magazine-14217443:

'Let's say there's 5.5% inflation - not far off the retail price index today - and 2.5% GDP growth, which is about what we hope for. Together that's an 8% change in the amount of money in the economy each year. So divide 72 by eight. The answer is nine. Nine years at those rates of growth and inflation would halve the value of the national debt as a share of national income. Bingo?'

Perhaps that's where Mervyn King is really coming from - maybe he realises our best chance of significantly reducing the national debt isn't through growth, but through inflation...

Jeff

[superfrank]

Bank of England causes inflation, claims former MPC rate-setter Andrew Sentance
http://www.telegraph.co.uk/finance/econ ... tance.html

breaking news: trashing the currency causes inflation!!

"The MPC has no track record of taking tough monetary policy decisions to underpin its credibility," he said, adding that despite its recent forecasting errors "the MPC has redefined it target – putting much more emphasis on its own forecasts... The internal consensus around the Governor has been a very important driving force."

so we're at the mercy of Benny Hill and his abysmal forecasts.

[superfrank]

after yesterday's 'shock' rise in inflation, today's news from the MPC is that inflation "might stay above 3% this year" (which means that it almost certainly will, and that is just the way the BoE really wants it).

Bank of England official warns on UK inflation rate
http://www.bbc.co.uk/news/business-17753235

i wish we could bet on future inflation/growth etc.

[Euler]

Interesting angle on inflation: -

http://www.advisorperspectives.com/news ... conomy.php