Inflation

[Totally_Baffled]

Hi guys

I agree, that it is surprising that we havent seen higher inflation figures due to higher energy prices.

I know at work, we simply cannot pass on price increases to customers because demand(sales) are too sensitive to price at the moment (I can only comment on Non food - not sure what the situation is with food retailers)

Suppliers are trying to pass costs onto us, but as we cannot pass them onto consumers without causing a disproportionate drop in demand , we both just have to absorb the extra costs.

Indeed to try and stimulate the market, we are actually dropping prices!

I think this is what the economists call 'stagflation', costs are going up, but retail prices want/need to go down!

The result is lots of cost cutting top pay for the lower/same retail prices which means more unemployed , which leads to even less demand which leads to lower prices etc etc

So we could see a situation where non essentials suffers deflation in prices, and essentials (like food) suffer high inflation.

Which ever way you look at it, it stinks!

[skeptik]

Hi guys

I agree, that it is surprising that we havent seen higher inflation figures due to higher energy prices.

Thers'e also the process called 'lag' . Producers resist putting up prices for as long as possible for fear of losing market share, and in the hope that their costs will come down again. So when input costs rise it takes a while to 'work through' the economy

[SILVERHARP2]

As additional points, you have hedging by utilities and airlines which have capped prices, however a lot of this hedging will run out later this year, in addition the great global labour arbitrage is continuing, as an example I was listening to a report on the news this morning where in an effort to keep their market share in the UK, Irish mushroom growers are illegally paying Eastern Europeans ?2 per hour (the minimum wage is ?8). So love them or hate them the big supermarkets are exporting their inflation abroad

[Ballard]

Obviously the CPI is heavily manipulated, but eventually as inflation takes hold the effects will become more and more apparent (unless the figures are based purely on ipods).

Take inflation. Officially, during the last decade, inflation has generally hovered between 1 percent and 3.5 percent. In 1997 it peaked at 3.7 percent, in January 2004 it was 1.4 percent, and currently it stands at 2.0 percent. But in most key areas of the economy, inflation has been off the scale. A March 2005 report published by Oxford Economic Forecasting and Cluttons Real Estate noted that house prices had risen nationally by an average of 11.4 percent per year every year for the past ten years. While property prices are controversially not included in the official U.K. inflation figure, similar if not larger rises have been recorded in transportation -- a one-day travel pass in London now costs ?6.30 -- utilities, with 2006 seeing a one-year hike of 20 percent for many gas customers, and oil, the price of which skyrocketed following recent instability in the Middle East.

And herein is the crux of the matter: the U.K. economy is built on consumer spending, which accounts for two-thirds of the nation's GDP. But consumer spending is in turn contingent on credit. The average salary in the U.K. is estimated to be around ?22,000 before tax, which in most parts of the country is not enough to comfortably subsist on: for the majority of people, to save anything substantial from that figure would require frugality. Luxuries such as brand-new home cinema systems and cars should in theory be exactly that -- luxuries.

What conclusions can one draw? Firstly, the official inflation figures simply cannot be correct. Two percent inflation in an economy with rapidly increasing living costs and more credit than real money in circulation does not even begin to make sense. Secondly, the reason that interest rates have not been pushed up to act as a fiscal cooling mechanism on growth is simple: with the current levels of household indebtedness and mortgage-related arrears, any move towards a realistic interest rate level will result in economic meltdown. No politician with any electoral ambitions will want to initiate such a move, perhaps least of all Gordon Brown, whose desire to take over the post of Prime Minister from Tony Blair is one of the less well-kept secrets in global politics.

http://english.ohmynews.com/articleview ... 8&rel_no=1

[Totally_Baffled]

Nice find Ballard.

I cannot disagree with the article.

The world economy seems to be in a bit of a paradox, even without our energy woes.

You have the consuming nations maxed out on credit (the UK and US primarily), the other western nations unwilling to spend (ie low consumer debt - france , germany, Japan etc) and the producing nations about to find themselves with shrinking orders from the former. On top of this the producer nations are still building surplus manafacturing capacity.

Now lets assume PO isn't imminent (say oil stays at around $60 for the next 20 years - ok some assumption!) , how would this economic imbalance or paradox resolve itself?

If there is a currency correction to raise demand for the consuming nations products then the consuming nations import inflation , interest rates go up , the US and UK housing/credit bubbles pop and the world economy goes tits up.

If there isnt a currency correction , then the producing nations have got to finance credit in the consuming nations to keep interest rates low (not likely! - and besides we are already reaching our borrowing limits!)

Can someone shed some light on this messed up situation!?

[SILVERHARP2]

Totally Baffled wrote- Now lets assume PO isn't imminent (say oil stays at around $60 for the next 20 years - ok some assumption!) , how would this economic imbalance or paradox resolve itself?

Demographics in the US would suggest that there will be an economic crises within 10 years, the baby boomers start retiring in force by 2011, this means the most asset rich class will start selling stocks and bonds to consume as pensions, there will be a tendancy to downsize from their "McMansions" and they will switch from being borrowers to savers, this will reduce the US current account deficit but would create recessions in Asia and probably Europe

[andyh]

Whats really been happening to inflation 'about the home':
http://www.thisismoney.co.uk/mortgages/ ... 2&ito=1565

[RogerCO]

Whats really been happening to inflation 'about the home':
http://www.thisismoney.co.uk/mortgages/ ... 2&ito=1565

The two-yearly study, by Sainsbury's Bank, looked at the cost of mortgages, utility bills, council tax, insurance, maintenance and improvements.

On the other hand as good PO aware citizens we are all already taking steps to get out of debt by reducing the mortgage, installing energy efficient measures to counter the anticipated continuing rise in utility bills (we ain't seen nuffink yet), we known that the odds always favour the bookie so don't buy any non compulsory insurance (what's the worst that can happen - its only stuff), and our maintenance and improvement costs are focused on real long term value with a payback (better insulation, micro generation, buying quality tools for the garden...). Of course the council tax is a bit out of our control - but does reflect the cost of the services we get from the council.

[dr_doom]

Gold has just broken $600/oz if anyones watching; usually a pretty good indicator of inflation.

That's a 20% gain in 4 months, or 60% annualised!

[Steve]

Hiya,

It's not just gold that's gone up (the highest level in 26 years), copper, silver and other commodities are shooting up as well, as investors smell a crisis and switch from paper dollars.

To make things worse the escalating prices of commodities are leading to spiralling costs in exploration and despite record oil prices companies and governments are complaining that it's hampering the search for more oil.

I don't know about anyone else but this looks like the start of the 'market realisation' that has been talked about.

The boss of a major hedge fund in London said in January that the smart money is on whether oil will peak this year and they're backing their hunch and driving commodity prices up.

It's not just Nigeria & Iran, they wouldn't be a problem if we had the spare capacity to carry on without them but investors are waking up to what's happening and it feels like they're extremely nervous of the near future.

P.S. Brent Crude hit an all time record high today of $69.24!

Cheers

Steve