Inflation and the interest rate.

Discussion in 'Current Affairs' started by wet_blobby, Jan 23, 2008.

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  1. wet_blobby

    wet_blobby War Hero Moderator

    Is it me or are we in a no win situation here?

    On one hand the Bank of England say inflation is going up due in a large part to rocketing fuel/energy prices and the cost of food (remember the bad summer, well that's coming home to roost now) Now this to me doesn't represent people spending there hard earned cash irresponsibly, we are being forced to spend more, not choosing to.

    However, this increase in spending is viewed as if we were all off to the shops on a massive spending jolly, the figures coming out of the high street support the view that consumer spending is down, yet interest rates remain high.

    Are the people who set these rates in touch with reality?
  2. Have the ever been in touch at all.

    He wont reduce our rate, he will wait to see if the yank reduction will take care of the probs first.
  3. Economists and reality are surely opposites rather than correlatives! :lol:

    This article, by Jonathan Freedland, says it all. I remember similar things being said just after 9/11 in the US media.

    Guardian: Comment is free: 23 Jan 08
  4. The likely hood of a rate reduction while inflation is creeping upwards is a non starter the very east is that they remain static,the main culprit is the cost of fuel and raw materials this the manufactuer has to pass on to the consumer bt restricting peoples spending power by use of interest is designed to put pressure on manufacturer to cut costs, there not much they can do about raw materials hence we will start seeing redundancis and start sliding towards recession in effect we are in a lose lose situation but dont dorget your lotto
  5. We are in a no-win situation, but it's not the Bank of England's fault.

    Inflation is going up. As Blobby noted, people are having to spend more- largely because the price of fuel and food is increasing. The classic response to this is to increase interest rates so that people borrow less money. Less money = less spending = less inflation. Normally this is the right thing to do in order to safeguard economic stability.

    The problem for the economy now is a bit more complicated. 1) Inflation is being driven by basic commodities; 2) the housing market is a vital part of the economy (because we don't make anything) and people need to borrow to buy houses; 3) people are already spending less money on the high-street.

    The last two problems stem from the credit crunch. There is already so much borrowed money, and so many bad debts, that lenders don't want to lend anymore.

    The combination of inflation with an economic slow down is stagflation, and it's bad news: remember Britain in the 1970s.

    As I understand it (and I'm not an economist), inflation is still the worse thing for the economy, and for people in general because it affects the value of the money in your pocket. That's why interest rates are being kept where they are. That isn't a consolation if you have, or want to have a mortgage.

    The real problem isn't interest rates- it's the fact that the Government has run a deficit in the last few years despite being in an upward part of the economic cycle (when you should have surpluses to squirrel away for a rainy day). Thus there is no public money to spend to support the economy, and Brown is having to cut public spending at the very time when there is some justification for increasing it.

    In short, not the Bank of England's fault: they are almost as powerless (ssshhh it's a secret) as you or I in terms of influencing the global economy or, indeed, Government policy.
  6. It is a really difficult balance to strike - yes some of the inflationary pressure is from things that can't be controlled and we could say that therefore we shouldn't worry about them, but in reality when costs go up, so do demands for increased pay and the UK economy has a bad history of pay increases driving inflation upwards in the past.

    The problem is that we are looking like we have pretty high interest rates in this country now, yet we still have inflationary pressures.

    As P2000 says the bigger worry really is the deficit that the Government has been running and it's increasing, as tax revenues are falling and furthermore likely to continue to do so especially in a slowdown - this is bound to lead to a squeeze on Government spending.

    So it seems thet Gordon wasn't so prudent after all!
  7. hence the fuel increase rise is popular in Government circles,most poeple drive yet another stealth tax
  8. The real inflation rate with the reality of day to day living is 6%. The political inflation rate to suit Gordon Brown is 2%. Roll on the next general election.
  9. very good appraisal want to be my chancellor
  10. chieftiff

    chieftiff War Hero Moderator

    Hmmm! Don't quite know where you got your figures from Jimbo because the latest published figures are here:Office of National Statistics

    A good explanation of the terms CPI and RPI is contained here: Open University CPI & RPI

    It's fair to say that the RPI at 4% probably represents the true rise in actual cost of living for the majority of people, unfortunately it's not quite as simple as that with CPI currently at 2.1% used as the measure of economic inflation by the government
  11. the real taxation rate for a basic rate tax payer is 36% to the pound when you had Nics,VAT,enviroment charrge,and poll tax, not to mention other hidden taxes
  12. chieftiff

    chieftiff War Hero Moderator

    As a percentage of what, earnings or spending? The % taxes that you pay out on your combined earnings and annual spending far exceeds 36% (obviously depending on your spending habits but I believe it was recently calculated at between 48% & 52%) just think about fuel!
  13. I know the official RPI figure is 4%,but my reference of 6% effects certain sections of society like pensioners who cannot claim means tested benefits.
  14. chieftiff

    chieftiff War Hero Moderator

    Fair one although pensioners don't quite get it as bad as you might think, pensions are now pegged agains the RPI not CPI (including service pensions) so their annual "inflationary" rises are generally nearer to the real cost of living increase...... however the RPI rate rise for pensions is based on the lowest inflationary month of the year; September, so a truly representative rate is unlikely.
  15. that is an average and takes into account a basic rate tax payer who may be elible for working or child tax benefits so you are probably right chief it probably is higher

  16. Iagree with what you say,but the point i am trying to make is that real inflation is not 2%.
  17. that is an average and takes into account a basic rate tax payer who may be elible for working or child tax benefits so you are probably right chief it probably is higher

  18. Assuming that:

    The basic rate of tax is 30%
    NI is around 12% (fag packet calculation)

    So of £1 you earn 42p has already gone in tax.

    What do you do with the rest of the money? For argument's sake you pop to the shops and buy something. VAT @ 17.5%.

    VAT on 58p (all you have left of your pound) represents another 10p, taking you easily over the point where half your earnings go back to the Treasury. That's even more pronounced if you use your money on things more highly taxed e.g. petrol.

    The irony is that tax revenues have grown more slowly in the UK, where tax has risen, than in the USA where taxes were cut.
  19. Taxes in the USA were not cut except for the top 1% tax bracket; in fact indirect taxation increased substantially as did the cost of living index as high oil prices began to affect the price of food, goods and transportation.

    In 2002 some of the pointy head economic gurus said that sustained oil costs >$75bbl would automatically produce a recession in the US economy when coupled with the $1 trillion costs of the Bush Middle-East adventures. They were ignored and the Fed allowed some very questionable financial practices to continue which culminated in the sub-prime meltdown the knock-on of which is now hitting the UK.

    The tax burden that the average John Q. is paying in the USA is very similar to that of the UK; the main difference is that in UK there is a National Health system financed by this tax burden and in the USA health care is paid for out of the family budget and is crippling in cost and complexity.

    Bad news is that a recession has definitely arrived in the USA and it is only a matter of time before it hits the UK.

  20. I see it is looking like Council Tax is going up 4% and was it something like 18% on gas and electric. What is our annual pay rise this year gonna be??? 3%??????? The future is not looking bright! I need a deployment!!!!!

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