Inflation 'might fall to 1% in 2009' - Bank of England ???

[Papillon]

The Bank of England has said inflation could fall below its target of 2% next year - and might drop as low as 1%.

http://news.bbc.co.uk/1/hi/business/7734522.stm

Sounds to me very unlikely, especially in the face of the Pound dropping against the PetroDollar. Your thoughts?

[clv101]

If it falls from 5% to 1% - it just as easily could go negative given the uncertainties on these things.

[SunnyJim]

I think inflation will drop. Could even go negative. Yes, we have the pound falling, but the drop in oil prices, and the sheer magnitude of the destruction of money we have seen will mean inflation will shrink. That's why they're trying to create as much money as possible at the mo, via government borrowing.

[biffvernon]

Our local post office has a large handwritten sign out saying "Great Deals on Euros Today". I didn't quite say bogof.

[grinu]

I remember last time the oil price was 50/barrel it was seen as an inflationary price.

Also, we are seeing massive money creation - the loans are being written off, but the money has already been spent - what's been destroyed is the need/ability to pay it back, so essentially people are having their debts written off and more money is being loaned in to compensate. And the massive injections of liquidity will find their way back into the system over time.

We may see a short period of deflation, but I'd be VERY surprised if we're not seeing inflation shortly. In fact I am betting on hyper inflation within 3-5yrs.

I think that the main reason for the current delfation is that because things aren't selling, there is a huge glut of inventory in shops, services, factories, warehouses etc. etc.

However, a lot of these products are now being sold at a loss and when the current inventory is gone, where is the incentive for people procure more? E.g. who is going to mine metals at a loss? Who is going to produce food at a loss? Who is going to manufacture goods at a loss?

I think that useful, essential, tangible goods will experience inflation like we haven't seen in 30yrs, whilst luxury tat will fall through the floor.

Just my two cents, which will be worth 2 bucks in three years time.

[biffvernon]

Also, we are seeing massive money creation - the loans are being written off, but the money has already been spent - what's been destroyed is the need/ability to pay it back, so essentially people are having their debts written off and more money is being loaned in to compensate. And the massive injections of liquidity will find their way back into the system over time.

Isn't it more the case that the loan write downs have actually reduced the money supply. Governments and central banks have acted to compensate but nothing like fully. It was the period of easy sub-prime loans that saw the massive money creation.

[grinu]

I can see where you're coming from, but the injections of liquidity are in the form of loans and I could see there being a tsunami of money rushing through the system when things get going again. Money supply in the us is up 90%

[Blue Peter]

I can see where you're coming from, but the injections of liquidity are in the form of loans and I could see there being a tsunami of money rushing through the system when things get going again. Money supply in the us is up 90%

Inflation is money supply times velocity of money. Money supply is up, but velocity is down,


Peter.

[skeptik]

I can see where you're coming from, but the injections of liquidity are in the form of loans and I could see there being a tsunami of money rushing through the system when things get going again. Money supply in the us is up 90%

But at the moment the banks are hoarding it, and its very difficult to get a loan of any sort. So..we have a period of deflation, possibly followed by riproaring inflation once confidence is restored and the economy turns upwards.

[biffvernon]

When you say banks are hording it you don't actually mean they're stuffing banknotes, coins and gold bars into the vaults. They're just not creating new money in the form of loans/debts like they have been in recent years. Hence money supply is down. Not up.

[skeptik]

When you say banks are hording it you don't actually mean they're stuffing banknotes, coins and gold bars into the vaults.

Effectively, yes. Desperately trying to build up capital. They know a lot of the debt they hold is shite and going to go bad on them.

[grinu]

Skeptik

So..we have a period of deflation, possibly followed by riproaring inflation once confidence is restored and the economy turns upwards.

Yip, that's where I'm coming from too, although there is liquidation at the moment, Mr Inflation has just picked up his next bowling ball and is bringing his arm back ready for a strike. How much power it has depends on how much money is thrown into the system.

[RevdTess]

...which is why i'm looking to buy property. When the govt wants you to spend they can make your savings turn to dust. So I'm using em. It may not be the bottom of the property market, or anything close, but losing money on a property I'm living in and fully paid for is not nearly so scary as having inflation cause panic buying of assets again.

In fact I'm currently expecting it to take at least until the end of 2009 before all the bad debt is cleared out and we can get back to 'normal' debt-driven growth (by which point we'll discover oil supply rather choked off from where it was).