PowerSwitch

http://www.bbc.co.uk/news/business-12196322

The link, above, is an "explanation" by the BBC economics section of their news site about inflation and what it is.

They state that inflation is a measure of price rises.

Wrong.

Price rises are an indirect measure of inflation of the money supply in the absence of an increased demand for it as well as being a measure of other things that effect the exchange rate of money.

In other words, price rises (or falls), which is what the CPI and RPI are measuring, are indirect measures of the exchange value of sterling in relation to the things it is exchanged for

None of this is complicated and yet we constantly see it being misrepresented in the MSM. There can be no doubt that this is deliberate misinformation.

I bet that article was written by an economist - most of them don't have a scooby as to what is actually going on.

While on the subject of people not knowing their backsides from their elbows, there's the clueless bankers who know nothing of finance

raspberry-blower wrote:I bet that article was written by an economist - most of them don't have a scooby as to what is actually going on.

I'd agree with that. Currently doing the background reading for a degree course in economics (Just because it interests me) and the amount of garbage that's written by economists in the papers is scary.

Mind you the same thing can be said about banking matters in general....

Yep

Saying that inflation is a measure of price rises is like saying it rains because the ground gets wet.

Now we have to skip lightly across the murky ground.

Price rises can be money supply driven or market driven. Whether you count a given price hike as a justified response to new market conditions or as a result of conspiratorial inflation is probably a political judgement.

For instance, after the massive floods in Thailand the prices of computers rose as a direct response to a contraction in the supply of hard drives.

House prices continue to rise in London due to a painful supply constriction.

Neither has much to do with the money supply but a lot to do with a surplus of buyers who have no real choice.

SleeperService wrote:

raspberry-blower wrote:I bet that article was written by an economist - most of them don't have a scooby as to what is actually going on.

I'd agree with that. Currently doing the background reading for a degree course in economics (Just because it interests me) and the amount of garbage that's written by economists in the papers is scary.

Mind you the same thing can be said about banking matters in general....

SS I'm curious to know whether your degree course includes modules on the history of economics?
Such as what did Adam Smith actually write about markets, why there have always been bubbles followed by busts, etc.
This appears to be lacking in the thought process of mainstream economists (although so does even the slightest hint of critical analysis)

JavaScriptDonkey wrote:Now we have to skip lightly across the murky ground.

Price rises can be money supply driven or market driven. Whether you count a given price hike as a justified response to new market conditions or as a result of conspiratorial inflation is probably a political judgement.

For instance, after the massive floods in Thailand the prices of computers rose as a direct response to a contraction in the supply of hard drives.

House prices continue to rise in London due to a painful supply constriction.

Neither has much to do with the money supply but a lot to do with a surplus of buyers who have no real choice.

I already made mention of the fact that price rises or fall can be a result of monetary supply changes or can equally be the result a change in supply of those things that money can be exchanged for. However, in both cases the measures of CPI or RPI are measures of the effect of changes in the exchange rate of money. Not the other way around.

In other words, if money becomes worth less, then prices for goods and services rise. If money becomes worth more, then prices fall. Not the other way around. Price rises or falls are effects, not causes.

I think when they talk about "inflation" being a measure of price rises, they actually mean the inflation index (i.e. CPI or RPI). Sloppy journalism not to make this clear.

Tarrel wrote:I think when they talk about "inflation" being a measure of price rises, they actually mean the inflation index (i.e. CPI or RPI). Sloppy journalism not to make this clear.

A measur eof price rises should not be called inflation becasue price rise are not inflation. Price rises are, amongst other things, a result of inflation of the money supply.

Indeed, the term inflation refers to an increase in supply of something.

A rise in the monetery price of goods and services occurs for any or a combination of the following resons:

A decrease in supply of goods/services in the absence of a decrease in supply of people wanting them and/or an absence of a decrease in the supply of money.

An increase in the supply of people wanting goods/services and/or an increase in the supply of money in the absense of an increase of the supply of goods/services.

Or, indeed, an expectation in the market-place of any/all of the above

Supply and demand in other words. Price rises or price falls are the result of changes to the suppy demand ratio.

Steve, I think what you have said about money supply might have been true in the past but that was with an adequate fuel supply so that the system had, in effect, an infinite supply of fuel to drive the economy. With Peak Oil we now have a limited oil supply to drive the economy so we are getting inflation driven by a shortage, and consequent rising price, of fuel. The same could be said, to an extent, for most minerals now.

These rising prices are causing inflation in the general economy which can't be addressed, in the traditional way, with high interest charges. I made this point to Spencer Dale, a board member of the BOE in 2011 and his reply follows

..... But although I remain concerned about the strength of the recovery, I am even more worried about the outlook for inflation. The task of the Monetary Policy Committee is to hit the Government’s 2% inflation target. As you know, CPI inflation stood at 4.5% in April. Inflation has been above target for 51 out of the past 60 months and it is set to increase further over the course of this year. As you note, much of the strength in inflation has been driven by increases in oil and other commodity prices. And I agree that a rise in UK interest rates would not directly affect those price rises (although it may cause sterling to strengthen somewhat which would reduce the sterling price of these commodities). But ultimately UK inflation is determined by UK monetary policy. If the prices of energy and other commodities continue to rise, the only way the MPC can meet its inflation target is to ensure that prices of domestically produced goods rise less quickly in order that overall inflation is kept under control. That is the mechanism through which a rise in UK interest rates will control UK inflation.

An increase in the interest rate as he wanted would probably not have any effect on the UK inflation rate as, at the time, UK demand for oil and commodities was a small part of the world demand which was rising strongly driven by 10% growth in BRIC countries. It would probably have caused stagflation in the UK as the higher interest rate would have put many fragile UK businesses out of business, increasing the unemployment rate.

The only ways that a UK business could combat a rise in its commodity prices without passing on that cost would be to increase productivity and/or accept a lower profit margin and/or decrease wage costs. The first would increase unemployment: the second would eventually lead to increased unemployment as businesses went bust: the third would lead to recession and probably increased unemployment as workers would have less to spend.

Meanwhile inflation would go ahead driven by shortages on the world market. So inflation plus recession is stagflation.

kenneal - lagger wrote:Steve, I think what you have said about money supply might have been true in the past but that was with an adequate fuel supply so that the system had, in effect, an infinite supply of fuel to drive the economy. With Peak Oil we now have a limited oil supply to drive the economy so we are getting inflation driven by a shortage, and consequent rising price, of fuel. The same could be said, to an extent, for most minerals now.

These rising prices are causing inflation in the general economy which can't be addressed, in the traditional way, with high interest charges. I made this point to Spencer Dale, a board member of the BOE in 2011 and his reply follows

..... But although I remain concerned about the strength of the recovery, I am even more worried about the outlook for inflation. The task of the Monetary Policy Committee is to hit the Government’s 2% inflation target. As you know, CPI inflation stood at 4.5% in April. Inflation has been above target for 51 out of the past 60 months and it is set to increase further over the course of this year. As you note, much of the strength in inflation has been driven by increases in oil and other commodity prices. And I agree that a rise in UK interest rates would not directly affect those price rises (although it may cause sterling to strengthen somewhat which would reduce the sterling price of these commodities). But ultimately UK inflation is determined by UK monetary policy. If the prices of energy and other commodities continue to rise, the only way the MPC can meet its inflation target is to ensure that prices of domestically produced goods rise less quickly in order that overall inflation is kept under control. That is the mechanism through which a rise in UK interest rates will control UK inflation.

An increase in the interest rate as he wanted would probably not have any effect on the UK inflation rate as, at the time, UK demand for oil and commodities was a small part of the world demand which was rising strongly driven by 10% growth in BRIC countries. It would probably have caused stagflation in the UK as the higher interest rate would have put many fragile UK businesses out of business, increasing the unemployment rate.

The only ways that a UK business could combat a rise in its commodity prices without passing on that cost would be to increase productivity and/or accept a lower profit margin and/or decrease wage costs. The first would increase unemployment: the second would eventually lead to increased unemployment as businesses went bust: the third would lead to recession and probably increased unemployment as workers would have less to spend.

Meanwhile inflation would go ahead driven by shortages on the world market. So inflation plus recession is stagflation.

Oh, I agree, a deflation in supply of the things that money is exchanged for in the absence of a commensurate reduction in the supply of money also results in price rises. Whichever way it is looked at, though, price rises result from a relative or actual rise in the supply of money in relation to the demand for it.

It's all just supply and demand.

What do you think of this short explanation of the US deficit?

Or this, Occupy's ideas for dealing with part of the debt?

emordnilap wrote:What do you think of this short explanation of the US deficit?

There was absolutely no mention made of personal debt in the economy except insofar as it was indirectly implied by the stimulus spending which was, in effect to cover those personal debts via the proxy of the banks to whom it was owed. Furthermore, even if that is true, it still doesn't include the further personal debts that are still hanging in the economy (due to the stimulus fending off a total collapse) and are causing people to not have any capacity for discretionary spending, in turn holding economic activity in check

In short, is this guy indirectly suggesting that the personal debt burden in the USA contributed only 5% of the overall deficit? That doesn't sound right to me.

raspberry-blower wrote:SS I'm curious to know whether your degree course includes modules on the history of economics?
Such as what did Adam Smith actually write about markets, why there have always been bubbles followed by busts, etc.
This appears to be lacking in the thought process of mainstream economists (although so does even the slightest hint of critical analysis)

RB the history of economics is covered but not as a specific module AFAIK, however the course is under revision (I'm not starting until next year). The Wealth of Nations is on the reading list as is Small is Beautiful.

Your last sentence sums up my reasons for studying the subject in a nutshell.
The other thing that is sadly lacking is an appreciation of the dangers of information assymmetry in a perceived Free Market. I think that and your statement go a long way to explaining the World since 2008.