Interest rates up to 1%, inflation forecast to hit 10% by the end of the year: BBC linky
I'm 33, so I've never lived (as an adult, at least) through this before. Should I be terrified? Will I soon be withdrawing my life savings in 20's to burn as fuel?
I think the most worrying thing about the present situation is that we have a government of economically illiterate incompetents who clearly haven't got the first clue what to do about it (and don't actually care anyway), so I'd say that any present economic forecasts are probably on the optimistic side.
I just count myself lucky that I'm in a position where I can afford to absorb a certain hit. There are going to be an awful lot of people who aren't so lucky and are in for an absolute nightmare
Normally you'd say that interest rate rises are a good way of tackling inflation caused by consumer spending, but that isn't at the root of this particular inflationary cycle, certainly not in the UK. All it will do is sharpen the cost of living crisis for people who are more heavily mortgaged relative to their income.
Still, I guess with the Fed raising them yesterday, not much option but to follow suit.
I remember back when Thatcher let us all buy our council houses and sold the dream of ownership to the working man... and not too long after, the interest rates went upto something stupid like 12 or 13%...and then the repossessions started.
Having said this I paid off the mortgage last month so maybe great timing.
I m guessing the personal inflation rate for a 33 year old is a lot higher than 10%. Looking at asset prices in general, well all of them cars, houses, are all up higher than 10%.
Going to get worse I m afraid, lots of people already struggling and can't cut back any more. If you are already cycling to work and shopping at the discounters there's not a lot else you can do.
If you are already cycling to work and shopping at the discounters there’s not a lot else you can do.
Rishi would advise you to maybe draw down a bit extra from your trust fund, or reduce the cleaning staff to just once a week?
It's not that they're economically illiterate (although they might be) it's the sort of advice they choose to listen to, and that's based on their politics (small state, market driven etc). It could be argued that raising interest rates to reduce inflationary pressures is pointless as we're already in a recession. However the completely avoidable forcing down of real incomes is just another aspect of class struggle, which most of us are losing. Odd how spaffing £300m on lethal aid is not considered inflationary.
Mortgage interest rates were 16% soon after we bought our first house in 1990! So they've got a bit to go yet. 🙂
On the flip-side banks should be forced to raise their savings rates at the same rate they raise mortgage interest rates (which they are very quick to do).
I think the most worrying thing about the present situation is that we have a government of economically illiterate incompetents who clearly haven’t got the first clue what to do about it (and don’t actually care anyway), so I’d say that any present economic forecasts are probably on the optimistic side.
This.
I'm not an economist but..
Maybe one could explain how increasing interest rates will control inflation given most of the inflation is being driven by supply side asset prices and shortages?
I remember the 90s recession very well.
I was made redundant from a five year employment for Christmas '92, I was 23yrs old.
There was no full time work in my trade, the bottom had fallen out of it. I was able to work two or three days a week sometimes, but sometimes could go a whole month without working at all.
I lived a hand to mouth existence after my redundancy money was spent but managed to hang on to the house. I actually ran completely out of money several times.
The house which i'd bought in May '91 for 54K fell to about 44k.
The boiler broke and I couldn't afford to fix it, spent the winters of '94,'95 without central heating.
Finally found full time work in summer '95 but it was two years before I could get a loan to do the house up and eventually sold it in summer '99 for 20k more than I paid for it.
Good years though and still had some great times.
Mortgage interest rates were 16% soon after we bought our first house in 1990! So they’ve got a bit to go yet. 🙂
Let's just put this in context; how did the price of the average UK house compare to that of the average wage?
Maybe one could explain how increasing interest rates will control inflation given most of the inflation is being driven by supply side asset prices and shortages?
https://www.economicshelp.org/blog/2006/economics/cost-push-inflation-2/
This is a reasonable explanation about how cost-push inflation works, and why interest rate rises in response could only be moderately effective, or actually push us into a proper recession...
B of E's fault for not putting rates up more steeply last year. had their chance and missed it. thanks again
Let’s just put this in context; how did the price of the average UK house compare to that of the average wage?
According to this average weekly earning were £70 ish per week back then (so £3640/year)...
https://adviser.royallondon.com/technical-central/rates-and-factors/national-average-earnings-index/
We paid £44k for our first house on a 100% mortgage.
Current average is around £600/week so a 8.5x increase...
https://adviser.royallondon.com/technical-central/rates-and-factors/average-weekly-earnings/
The house we bought would be 250k ish now.
Throw in labour shortages due to Brexit and the solution to that is to shrink the economy to the level where there are fewer jobs. Keep the unemployment up, puts pressure on the wage rises. starts to make the economy more competitive against Vietnam
According to this average weekly earning were £70 ish per week back then (so £3640/year)…
https://adviser.royallondon.com/technical-central/rates-and-factors/national-average-earnings-index/
/blockquote>those numbers from pre 2010 are an index, not an absolute number of pounds earnt per week.
the average weekly wage in 1990 (for men) was £290.30 per week (source: https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/earningsandworkinghours/adhocs/006810newearningssurveynesagegroupgrossweeklyandhourlyexcludingovertimedata)
So ~£15k per year, so if the average house in 1990 was £44k , it was ~2.9 times average wage .
Odd how spaffing £300m on lethal aid is not considered inflationary.
Treasury simply making an accounting adjustment, moving stuff from the MoD asset register to Overseas Aid and banking it as ‘future income’ rather than expenditure.
The UK has a chronic economic malaise - there’s limited room to ‘grow’ the economy to compensate through increased productivity as there are over a million fewer workers (EU returnees and over-50s jacking it in) we have relatively full employment but at the same time lots of skills shortages hampering business. One solution would be to encourage migration, but the racists, sorry Tory voters won’t like that. Brexit has also contributed by making exports to our nearest, most affluent market harder. UK is also over-exposed to retail and services/hospitality which means if consumer confidence dives, then so does the whole economy.
Interests rates are still rubbish, which is inflating the property bubble even more with more, cheap debt but now interest rates are rising, could be painful for some.
I struggle to see how there isn’t going to be a painful ‘adjustment’ for some as there are strong global economic headwinds against which the UK has few effective levers - there’s possibly a long way down to go.
Struggling to find a degree of optimism in this lot - we need billions in investment over a couple of decades to make a difference whilst this Government are trying their level best to shovel money from the public purse into the hands of their mates and offshore and policy extends to 3 or 4 word slogans.
B of E’s fault for not putting rates up more steeply last year. had their chance and missed it. thanks again
Yeah, just blame the messenger rather than the culprit 😀
Yea, OK, it's not their fault. I suppose the B of E has very limited influence on the economy, but going to 1 or 2% last year would have made a difference more quickly.
However, this does assume interest rates matter in the current situation. I beginning to think they are too broad a tool for the job. Diversifying the UK economy through investment, improving the labour market through education/training and re-structuring the housing market would make the economy more durable against rising consumer prices.
Inflation at 10% is 10% of everything you've ever earned ever becoming less valuable.
We've been printing money like it's going out of fashion since the 2008 crash. What else was going to happen? 20% of all dollars in existence printed in the last year or so.
Those cryptocurrencies looking less volatile now - not least because governments can't just devalue them.
Welcone to the 1970s.
Time for rishi to shine...
Whilst a lot of inflation is being driven by increased prices of imported goods and commodities rather than cheap borrowing, increasing interest rates should have an indirect benefit; increasing interest rates increases the value of the pound meaning we can buy these more cheaply.
Of course other countries with stronger economies are raising mates more quickly so overall the pound is still devaluing, just not as quickly as it could.
A recession seems inevitable given the global shortage of oil and china's zero covid strategy restricting supply of manufactured goods. Frothing about tories is odd, not much any uk party could do about that.
chevychase
Free MemberWe’ve been printing money like it’s going out of fashion since the 2008 crash. What else was going to happen? 20% of all dollars in existence printed in the last year or so.
So all other things aside, this is something that worries me a lot- because quantitative easing/printing money isn't the cause of this. Not exclusively, anyway, and it's almost certainly not the biggest driver. But people are going to blame it for the entire mess and that'll make it less likely to be used properly when we need it.
Those cryptocurrencies looking less volatile now – not least because governments can’t just devalue them.
Bitcoin literally fell by 9.5% between 1.30 and 7.30 this afternoon alone. And it's down 23% in the last month.
Dovebiker's absolutely spot on. Take Boohoo's woes as an inicator for the UK economy. (Slightly facetious, but sadly only a bit).
Possible man maths coming up...
I think high inflation is making me better off.
I have a very large debt (mortgage) luckily fixed at 1.8% for five years in December. My pay went up 4% last month (annual rise)
I have next to no savings.
Inflation is 8-10%.
.
So, the value of my salary is going down roughly 4-5%, pay rise less than inflation, but the value of my much bigger debt (3x salary) is going down more, loosing 6-8% of its real terms value therefore I am better off?
This all depends on keeping the job and still being able to afford food of course...
I don't feel better off obviously, food and diesel and things are getting quite pricey, but if it carries on like this I will be mortgage free much sooner.
It’s giving me a few additional grey hairs.
We’re very close to exchanging on a house move to the other side of the country. The mortgage offer expires next week and the bank are very non-committal on extending for a couple of weeks to get it over the line. There’s been 2 rate rises since the offer was made early February and looking at the numbers over the weekend, the affordability calculators have taken a sharp downward turn, despite a pay rise for both of us in April.
If we had to apply again, the equivalent rate on a 5 year fix is nearly 1% worse than on 1st Feb, which will make a material difference over the fixed period. Some evidence that house prices are slowing down where we’re buying, but availability is still poor and things are going on and off the market quite quickly.
50:50 whether we can the whole thing, or stick our fingers in our ears and plough on regardless.
Job wise we’re relatively secure but April’s sales figures in my company tanked and feedback from the sales guys is that no one is committing to any big expenditure.
Inflation at 10% is 10% of everything you’ve ever earned ever becoming less valuable.
Only if you have kept it all as cash. If you have, you know, spent it, on things which are rising in monetary terms by 10% then it makes no difference at all
Inflation is complex, and most people seem to have an handle on it here from what I've read. Which is good.
The right-wing argument by the likes of the ridiculous John Redwood is that we printed too much money. This is nonsense - the BoE performed Q/E to buy bank bonds of 400 billion which sit on an asset sheet. 400+ ish billion was then spent on covid which sits on the other side of the sheet. The government owns the BoE and between them they really operate as one entity to keep the economy moving - albeit with complex accounting structures. But the BoE is the government's bank and is responsible for clearing government spending.
That money effectivity replaced incomes and supported the economy from total collapse.
This is a supply side inflationary leap - therefore given the CPI increase which is already not born out by spending with credit - then it's ridiculous that the interest rates are rising to fix this.
You see the BoE are all out of mechanisms, one lever to adjust one type of inflation is not enough but they are desperate to the financial world to look like they're doing something.
Solutions: well the forthcoming likely recession will likely make a dent (but not for good reasons.) And eventually given were only just moving out of the pandemic then it's fair to expect that it takes a while for things to correct themselves with supply chains.
Tax the top end of wealth too - their demands on resources definitely create scarcity.
(Not to mention the cost of energy and war etc )
However I feel we're generally in very unusual macroeconomic circumstances that are likely to throw up a few curve balls in the economy over the next few months.
https://twitter.com/D_Blanchflower/status/1522614346232340481?t=0cFOTmx5PVaSDUajHAvCRg&s=19
Good recent podcasts about inflation, government spending and 'post' pandemic economics.
https://podcasts.google.com/feed/aHR0cHM6Ly9mZWVkcy5wb2R0cmFjLmNvbS8xOVd6VlR4MV9IZlg?ep=14
Oh and Mark and Carrie are great too.
https://podcasts.google.com/feed/aHR0cHM6Ly9mZWVkcy5jYXB0aXZhdGUuZm0vbWFyay1hbmQtY2FycmllLw?ep=14
Mark Blyth (Scottish economist / author - professor at Brown University)
, increasing interest rates should have an indirect benefit; increasing interest rates increases the value of the pound meaning we can buy these more cheaply.
Particularly fuel, as oil is priced in dollars. If we have higher interest rates than the US then that helps sterling relative to the dollar.
It's been fairly stable against the euro the last few months but has recently dropped fairly significantly relative to the USD, CAD, AUD
@rone and others thanks for the (apparently!) knowledgeable and informative contributions, I appreciate them.
AndrewH - no you aren't likely to be getting any richer. You've got a pay rise , good, but stuff you need to buy is getting pricier faster so your moneys is worth less. Also , you've fixed your mortgage, so that isn't going up, but the number value of your mortgage isn't decreasing, so you need to pay it off, it's just that it's worth less in real terms when you finish.
EXCEPT in one scenario where you have a VERY large amount every month going to the mortgage, and the increase in your large salary in this case means the very small amount you spend on food etc. has gone up, but so what ?
While you can't blame the government for global crises (normally) they carry the can for the state of the economy as they control how the UK economy is steered, and I don't think they've done a very good job the last 12 years. Dovebiker above sums up what needs (needed) to be done very well, but that hasn't happened and the UK government has done pretty much everything it could to weaken the country. Stuff like Austerity, Brexit, lack of modernisation, no effective policy on productivity, and now the shambles of 'levelling up', taxation, student loans et al. - all those are political decisions that effect the economy, so it is right to 'froth about the tories', and if you're not frothing that's your personal politics . On the upside house prices have gone up along with inequality , poverty and the stock market
If you are already cycling to work and shopping at the discounters there’s not a lot else you can do.
Oh goody.
Slight tangent, but as far as savings go - if money is earning very little in the bank, inflation is 10%, and mortgage interest rates are at a couple of %. The sensible thing to do would be, presumably... spaff it all on coke and hookers while it's still worth something?
We’ve been printing money like it’s going out of fashion since the 2008 crash. What else was going to happen?
Sigh, I see 20th century economic dogma is alive and kicking. Had we not ‘printed’ all that money after 2008 we would have had a massive depression. Had we not ‘printed’ all that money during covid the entire economy would have collapsed.
The inflation we have now has nothing to do with money creation and everything to do with the disruption of supply chains, and reductions the labour force caused by the double whammy of covid and brexit.
The bigger problem with all the money created from QE is that a lot of it has gone to the wrong place. Instead of being invested into the economy and supporting working people with good jobs and wages it’s ended up in the pockets of the rich. And now working people are being expected to ‘pay it back’ with higher taxes and higher inflation. It’s daylight robbery basically, pure unadulterated kleptocracy.
The sensible thing to do would be, presumably… spaff it all on coke and hookers while it’s still worth something?
That's another big reason rates need to rise even when the trigger is supply driven; when everyone starts spending instead of saving it shifts from a supply driven shock to persistent demand driven inflation.
As someone else that is 33, what strikes me is that we've never lived as adults in a period of serious growth or opportunity. Endless austerity, poor growth and then recession. I'm heading abroad this year to do a couple years as a non-resident. Only way to save any cash, buy a house and have a family one day.
