British inflation

[RandBlade]

I think currency factors can play a role, definitely, but inflation in the US is extremely low (about 1.1%) and has been since June, while Germany's inflation rate is a still lackluster 1.5%, with France at 1.6%. I don't think that currencies are that different; GBP was $1.61 back in January, dropped down to the high $1.40s in May/June and has stabilized in the high $1.50s for the last half year. I can't imagine that's feeding so much into 3+% inflation month after month. I don't doubt it's a factor, but not the factor.

You are right to say that the main part of the currency fall happened late last year - so did the rise in inflation. Inflation has been consistently 3%+ since the currency fell and for over a year now.

True of nearly every other developed country in the world. Given the large output gap remaining in the UK (as well as the US and much of everyone else), why would this feed into inflation when it doesn't do so elsewhere?

The UK has typically previously had higher interest rates than the USA or Eurozone, so our reduction in interest rates was greater than yours - even if they went to the same level, they did not come from the same level.

Correct me if I'm wrong, but isn't the Bank of England independent? I know you don't like the Labor party or their fiscal policy, but monetary policy is not set by them. Also, same argument goes as above - QE is a way to effectively drive interest rates below zero, and everyone else has done it as well (often far more aggressively than the BOE), yet they're not seeing the same banner inflation. What gives?

Technically the BoE is independent yes, but practically? Gordon Brown personally chose who the members are who were in the BoE and it takes a brave independent body to say no to the government. The governor of the Bank of England has spoken of the pressure put on them by the prior government. The BoE also doesn't have the history of independence that other similar bodies do across the globe, it was Gordon Brown himself who made it independent (one of the few positive things he did).

Monetary and fiscal policy also need to be viewed together, the UK had one of the worst budget deficits in the developed world, so is it a surprise that inflation rose?

Ditto for everything else in this list - applies to everyone, and I don't think England has some remarkably disproportionate use of oil that's going to drive their consumer price inflation somehow differently from everyone else's.

Wrong, oil has risen in price in the UK 25% more than it has in the US due to the fall in sterling. That is a massive impact on inflation.

This is fair enough, but I feel that since the majority of the fiscal tightening has been in spending (and less in taxes), that would balance out to a net contractionary and deflationary pressure (at least in the short term).

I don't think it's fair yet to say that fiscal tightening has even happened. We have had the insane fiscal loosening, the splurge of cash that took us to a point where for every £4 spent £3 was taxes and £1 was borrowed, but the "tightening" that has had so much publicity has been announced but not yet really worked into the system. There is a delay between the government announcing it will stop doing something and it actually stopping, most of the fiscal tightening will occur over the next 4 years - it's simply not happened yet.

I definitely agree this is a problem. Monetary and fiscal policy can be loose as long as current inflation remains reasonably low, but inflation expectations should never budge unless something fundamentally weird is happening with your economy or people have resigned themselves to higher inflation for some reason. I don't know if the BoE is doing a bad job or not - and I hesitate to blame higher inflation expectations on chronic underestimation of inflation estimates - but clearly something bad is going on. I'm just not sure what it is.

Again, commodities which we were more uniquely hit by due to sterling are the single primary cause of the inflation.

If you check the breakdown of goods as to what has had price inflation and what hasn't, the biggest drivers of inflation have been commodities - oil, food etc - that have globally had inflation, plus the UK's purchasing power fell by 25%. The rise in inflation coincided perfectly with the fall in sterling. Sterling hasn't recovered, if it does you'd see a fall in inflation I'd expect.

You're going to have to walk me through that one. Why would the pound's status as a reserve currency (or not one) have an effect on consumer price inflation?

It wouldn't directly I disagree with Ag, except that if sterling hadn't fallen we wouldn't see such inflation - but we'd see other problems instead.

Your bolded part is bullshit, US inflation is dangerously low.

Another factor to bear in mind, ours was higher previously I do believe. You did come close to having deflation, we never did.

From the ONS, CPI (official inflation now) = Cyan, RPI (what used to be official inflation) = black, RPIX (excluding property) = blue.


CPI has been above 2% for years now, deflation was never a real threat here. CPI was already 4% when the crisis started in late 2008.

[RandBlade]

Tell the UK what they're doing wrong, then. When OPEC has control over the price of oil, all oil-dependancies are tested. Remember US summer two year ago, when gas hit $4/gallon?

What about it? Petrol prices in the UK are higher than the summer of two years ago, currently at an all-time record. Is that not the case in the States? I didn't think it was, but why would one nation have an all-time record and another be less than 2 years ago? Because oil is priced in dollars and our currency has fallen 25% - so oil price in pounds has suffered 25% inflation just from currency essentially, as I said.

The pound sterling is pegged to the USD. Most commodities (and oil) are.

No it's not, and pound sterling is a currency not a commodity

How do you figure that? What do you think the pound sterling is pegged to?

Nothing, like Wiggin said. The pound sterling isn't pegged to anything, we have a freely floating exchange rate.

[Lebanese Dragon]

No it's not, and pound sterling is a currency not a commodity

I think it's not bad to view money as a commodity itself. There is definitely a demand on currency, it is use in trading just like any other commodity could be used in trading. I do think it's a very special commodity, in that it is so liquid, tranferable etc... It has perfect flexibilty. I can't get just anyone to trade for my rocking chair, but i can get someone to trade for worth of that rocking chair in dollars.

Widely accepted, liquid, transferable commodity. As the demand on that commodity increases (say the demand for money) then it's worth increases relative to all other goods. aka deflation. I think it's governed by the same laws of supply and demand, and if you wish to view it as a commodity you may. There may be other commodities with similar properties, perhaps gold is one, or diamonds. They're widely accepted, if our system was designed for it, as in they had a standardized way to measure the diamond, you could in theory trade with them. I think if people were more knowledgeable about diamonds they would. Definitely a big seller of diamonds would be willing to do business in diamonds as easily as cash. I'm having a bit of fun here, but we can argue it's a special commodity.

I agree it has some key differences, and perhaps the largest is that it has no value for it's own sake, as other commodities do.

[GGT]

What about it? Petrol prices in the UK are higher than the summer of two years ago, currently at an all-time record. Is that not the case in the States? I didn't think it was, but why would one nation have an all-time record and another be less than 2 years ago? Because oil is priced in dollars and our currency has fallen 25% - so oil price in pounds has suffered 25% inflation just from currency essentially, as I said.

How much of your oil price is from UK add-on fees or taxes, though?

No it's not, and pound sterling is a currency not a commodity
Nothing, like Wiggin said. The pound sterling isn't pegged to anything, we have a freely floating exchange rate.

'Floating' value relative to the euro or USD, or your CPI, right? If oil is priced in USD, and the pound has an exchange rate relative to the USD....isn't that being 'pegged' to the dollar? Maybe that's the wrong term.

The rise in inflation coincided perfectly with the fall in sterling. Sterling hasn't recovered, if it does you'd see a fall in inflation I'd expect.

You're saying there's just a "lag" between QE announcement and making its way into your economy, but once it does the pound will gain value and inflation will go down?

[LittleFuzzy]

'Floating' value relative to the euro or USD, or your CPI, right? If oil is priced in USD, and the pound has an exchange rate relative to the USD....isn't that being 'pegged' to the dollar? Maybe that's the wrong term.

Every currency on the market has an exchange rate relative to the USD and to every other currency. Being pegged means that the value of the currency is fixed relative to another specific currency or commodity, usually the dollar or the Euro, via deliberate manipulation by the relevant governments/central banks. A floating currency has its value determined by the market *within limits, most central banks/governments will intervene if/when their currency becomes too volatile* Most currencies float these days, and some countries meddle more with their "floating" currency than others. The UK is a country that meddles more than the average, but it doesn't come anywhere close to an attempt to maintain a fixed exchange rate.

[Lebanese Dragon]

'Floating' value relative to the euro or USD, or your CPI, right? If oil is priced in USD, and the pound has an exchange rate relative to the USD....isn't that being 'pegged' to the dollar? Maybe that's the wrong term.

I really don't know how dynamic the pricing on Oil is by the way RB made it sound, it's like they pick a price in a given currency then stick with it all year, whicih sounds retarded to me. However, that is also the only way I see his comment making sense. Why else would it matter which currency the cost of oil was set in? If we set it in Euro's, and euro's worth goes down then the cost of it the oil will go up in euros. And if dollar doesn't suffer inflation, the conversion from dollars to Euro will change in the dollars favor by the exact percentage, and they will then be able to still buy it for the same number of dollars as they did before. I agree that inflation or deflation can hurt people, but what they are pricing it in, I don't see how that mattes, unless the price is fixed and not dynamic. Or were playing off some lag time between exchange rates and infationary changes, but I think the gap would be small. Elaborate if you will on to why them pricing it in dollars makes any difference. It seems a flaw in the system for that to matter, either retarded way to price the oil (non flexible) or falling victim to some issue of lag between price adjustment and inflationary changes.

As for the floating thing, that just means the market determines what the worth of hte dollar will be. The supply and demand on the dollar determines its worth. It's not tied to the supply and demand for gold, or some other product, same is true for all currencies. The downside of tying it to an item is that the physical limit on how much of that item there is caps out total collective worth. It can hold back your currency, make it less flexible.

[RandBlade]

Oil was above $100 per barrel for about 7 months in 2008 when £1=$2. So it was above £50. Oil peaked at $145 (£72.50) but was consistently around $110 (£55)

Today oil is less at $86 but pound is less too meaning in pounds it's now £56.50 per barrel. From $110 the US has seen a 20% fall in the price of oil, but for the UK it is marginally up not down.

Oil in barrels (before tax) now costs nearly 30% more in the UK relative to the US. A big impact surely on inflation - the same for everything else we import too.

[GGT]

http://www.bbc.co.uk/news/business-11968437

UK petrol prices reach record high


Petrol prices have hit a record average level of 121.76p for a litre of unleaded petrol, according to the monitors Experian Catalist.

It is expected that fuel prices will rise further in January once increased fuel duties and the higher VAT rate come into play.

Experian Catalist estimates that higher VAT will add 2.5p and fuel duties will add a further 1p a litre to prices.

The diesel price of 125.73p a litre is 8p away from its record of July 2008.

The records referred to do not take account of inflation.

AA president Edmund King said the record high petrol prices were partly down to the freezing weather disrupting fuel deliveries.

The price of oil - currently at about $90 a barrel - has been trading at its highest level for this year and is also putting pressure on fuel prices.

The AA said the record fuel prices meant motorists would have to pay an average of almost £6 more to fill an average tank compared with the start of the year.


Mr King told the BBC: "The gloomy thing on the horizon, quite frankly, is come January, we've got the VAT hike, plus another increase in fuel duty - and, those things combined will add about another 3.5p a litre.

"So, for those people dependent on road transport, it's not looking like a very happy Christmas or indeed New Year."

The RAC's motoring strategist, Adrian Tink, said: "It's unbelievable to think that, compared with this time last year, petrol is 13p a litre more expensive.

"While the increases this year have been driven by a number of factors, you can't get away from the fact that we have seen five rises in fuel duty in the past two years - and we're due another one in January, plus a VAT rise."

He called for January's fuel duty rise to be cancelled.

Bad weather, fuel duties, higher VAT....

[RandBlade]

Cheeky thing is the government charges VAT on duty. So a 3p/litre increase in duty (what we'll have had from April to January) will actually be an increase at the pump of 3.6p/litre or 18p(28c)/gallon.

[GGT]

[CNN had George Osborne in an interview. Bottom scroll said he's the heir to a Baronetcy. WTF? ]

[RandBlade]

[CNN had George Osborne in an interview. Bottom scroll said he's the heir to a Baronetcy. WTF? ]

He is, in Ireland. He is heir apparent to the Baronetcy of Ballentaylor, in County Tipperary, and Ballylemon, in County Waterford. http://en.wikipedia.org/wiki/Osborne_Baronets

Given that its in the Republic of Ireland I have no idea what (if any) meaning that actually has.

[GGT]

You guys still have Aristocracy and the Ascendancy? .....sounds like an odd 'relationship' to old money and privilege for a government official guy, especially if he wants to make big cuts.

The Financial Times describes Osborne as "metropolitan and socially liberal. He is hawkish on foreign policy with links to Washington neo-conservatives and ideologically committed to cutting the state. A pragmatic Eurosceptic".[37] There is evidence of this commitment to cutting the state in his party's manifesto, with Mr Osborne and the Conservatives seeking to cut the deficit "faster and deeper" than any other main party as well as committing to various tax cuts such as inheritance tax and national insurance. According to an IFS report before the 2010 election,[38] the Conservatives needed to find more money from cuts beyond what they had outlined than any other major party, although the report was also critical of Labour and the Lib Dems.

Ah, crap, here we go again.....

[RandBlade]

Ah, crap, here we go again.....

Where do we go again? A government slashing ridiculous expenditure and making small cuts in taxes? Good

[Lebanese Dragon]

All I was getting at is pricing it in dollars or Euros, or rocking chairs at the end of the day makes no difference. It's not going to make it cost more for you. If they're not pricing it in Dollars then they can price it in Euros, and the Euro would go up from 2008 to 2010, but the exchange rate for the dollar would change so it'd still go down for those in the U.S. Just sounds like your blaming the price for being in Dollars as if that changes in anything, it just helps you realize the dollar to euro exchange rate.

[RandBlade]

No, is it really that hard to understand?

Oil is priced in dollars.
Pound has fallen against the dollar.
QED Oil costs more in pounds.

[agamemnus]

You forgot one important factor: "assuming nothing else has changed".

[RandBlade]

Given the conversation with wiggin about why the UK had inflation but USA does not, what relevant has changed there that I missed?

[GGT]

February 23, 2006
Look and learn from across the Irish Sea
A generation ago it would have seemed ridiculous to go to Ireland for economics lessons. Not any more
George Osborne
A GENERATION ago, the very idea that a British politician would go to Ireland to see how to run an economy would have been laughable. The Irish Republic was seen as Britain’s poor and troubled country cousin, a rural backwater on the edge of Europe. Today things are different. Ireland stands as a shining example of the art of the possible in long-term economic policymaking, and that is why I am in Dublin: to listen and to learn.

http://www.timesonline.co.uk/tol/com...icle733821.ece

oops?

[Lebanese Dragon]

No, is it really that hard to understand?

Oil is priced in dollars.
Pound has fallen against the dollar.
QED Oil costs more in pounds.

Did I disagree with that anywhere? I'm just saying if the dollar didn't exist and the item was priced in Pounds it'd be the exact same amount, we would just say directly the pound has suffered inflation that is greater than the drop in value of the barrel. So while relative to the 2008 Pounds it would have went down in price, but for the 2010 Pounds it went up.

[agamemnus]

Given the conversation with wiggin about why the UK had inflation but USA does not, what relevant has changed there that I missed?

I'm just saying... many things happen in real life... In that time period that the pound has fallen against the dollar, the oil price went higher against the dollar, too.

[RandBlade]

I'm just saying... many things happen in real life... In that time period that the pound has fallen against the dollar, the oil price went higher against the dollar, too.

No it didn't.

[agamemnus]

No it didn't.

That depends on your time horizon and whether you consider $138 a barrel prices (bubble) real. :P Another thing you forgot is the time horizon. So you may be right if you look at it from July 2008 to now, but not from November 13.

November 13, 2009:
Crude oil prices at $76.35, US dollar/pound ratio at 1.67.

Now:
Crude oil prices at $88.02, US dollar/pound ratio at 1.57.

:P

Maybe you should also discount the fact that crude oil was at bubble pricing for most of 2008, while the dollar/pound ratio was stable at 2 for almost 3 years.

http://www.nyse.tv/crude-oil-price-history.htm

http://www.google.com/finance?hl=en&...ed=0CB4Q5QYwAA

[RandBlade]

1.67 -> 1.57 is barely a statistically significant move and cherry picked data

July 18, 2008:
Crude oil prices at $128.88, US dollar/pound ratio at 1.998 ... that's a significant change.

[wiggin]

I don't really have time to wade through most of this, but I thought RB deserved a response, at least. I think you've definitely shown reasonably that currency depreciation is part of the problem. I don't have the time to figure out whether it can account for all of it, so I'll have to leave it alone for now. Thanks for the info, RB!

[RandBlade]

Thanks wiggin!

Your guess is as good as mine which other factors are in play, personally I hope inflation doesn't take off - I have a mortgage to pay now and could quite do with interest rates staying at the all time low once I come out of my fixed period.

[Lebanese Dragon]

1.67 -> 1.57 is barely a statistically significant move and cherry picked data

When he included the exact day, that's what i was thinking exactly. So you find the one day the price plummeted and report that. I hope you understood what I was saying, I was not disagreeing with your comment so much as clarifying a point. I think we're on the same page now.

Lastly, I agree that what you said demonstrated the inflation of the Pound relative to the dollar. The pound suffered a much greater inflation that's why the dollar was paying less in 2010 and you guys are paying more. I get that, you may also have more money so your purchasing power remains unchanged.

I never disagreed with you, in fact I didn't think I was being unclear, I knew what you were saying and your three sentence explanation was very eloquent, I just wanted to note we can have this conversation about how barrel prices have changed without invoking other currencies. Though it helps as a way to notice the difference in inflationary changes for each group, which is a possible component for why prices are rising so much verses the U.S.

[agamemnus]

Wait wait wait, if you take July 2008->now, actually oil prices went down even in dollar terms; they didn't stay the same. The pound/oil trend seems to be oddly and remarkably similar, but the scales are different.

[RandBlade]

Wait wait wait, if you take July 2008->now, actually oil prices went down even in dollar terms; they didn't stay the same. The pound/oil trend seems to be oddly and remarkably similar, but the scales are different.

"Even in dollar terms", what are you talking about? That's the whole point, that they went down in dollar terms.

[Lebanese Dragon]

Aga, it's clear me that you're not big into economics. I'm not either, but I minored in it, and i enjoy it a lot. I enjoy thinking about it, it's a very beautiful awesome structure and it uses basic premises coupled with logic and you come to some great conclusions about how the market works.

Let me explain to you what's going on.

Two basic ideas is the more sellers of an item, the more an item is made availabe, through price wars it lowers cost. The more people want the item, the higher the demand, it goes up. Because the more people are buying items therefore the more items are being produced, through increasing marginal costs this forces the price of all the products up. (marginal is the cost to produce the next item by the manufacture) for most items marginal cost increases with the number of items produced. So the first layer of oil is easy to pump out, the deeper the more expensive. So the first barrrel may cost me 2 dollars but to make the 3rd barrelt it cost me 3 dollars. So the minimum i can charge is 3 dollars if I charge less, i shouldn't have gotten that last barrel. This as well as other factors will increase the price of the goods. In a perfect situation P= MC.. price is the marginal cost of the last/most expensive barrel produced. Situations never get this ideal, maybe for some products. In general, in real life P>MC where P is price. and MC is marginal cost. I think in the long long run (whcih never happens) Price= Average Cost = Marginal Cost. Where average cost is all your costs divided amongst what you sold. You start up cost, your variable costs, etc... This is where your making 0 dollars in profit as a company. This is the situation where it's easy for random people to start businessess, and if there is any PROFIT in a market niche it will instantly be siphoned to 0 dollars by competitor entry. This is a long run end state, which may happen in a simpler/ideal world.

I hope that made sense. Let's talk about oil, and inflation.

Oil prices can go up based upon restricting supply, or increased demand for the reasons above. Also though one can think of money as being a product like a rocking chair is, and it to has a worth, you can buy money with a rocking chair, or you buy a rocking chair with money. You need to let your mind interchange these two. Then we can see that money to follows supply and demand. So if we all of suddent double the amount of money EVERYONE has.. we increase supply, but demand remains changed (population size) then the value of the currency will go down, and a rocking chair will now be traded at a higher price. in this ideal situation everything doubles. so if you could trade a rocking chair for 10 dollars we now can trade it for 20 dollars. If people all of sudden stop wanting the dollar (effectivel ya population shrink) the value of the dollars goes down. Supply is high demand is low...

We call this change in price of goods, over time... inflation. Then we can speak of 2008 dollars, what could they buy, what was their purchasing power. How does that compare to what 2010 can buy, what's their purchasing power. We have sense of how much someone had in 2008 what is the equivalent in 2010?

What's happening here is simple. Through demand changes, or supply changes both the dollar and Euro inflated meaning it takes more to buy the same thing. However the Euro inflated more than the dollar, so we expect Euro prices to have either fallen less, or have risen more than the items that we are buying with the dollar.

So a barrel of oil through whatever mechanism has lowered in price, maybe more suppliers maybe some other factors (innovations in drilling technology, the war has died down in the area, so this would be like more suppliers), at the same time the Pound is suffering inflation, so maybe they printed a bunch of it, or maybe they put a bunch into circulation. Whatever they did.

Let's look at this fake situation:

LEt's say oil dropped by 50% (price was cut in half)
However during that same time period inflation was a 110% on the Euro, and 75% on the dollar.

This means that while the price was cut in half, the euro is worth less than half as much as it used to be. So 10 Euros today is worth less than 5 Euros was.

So if a barrel used to cost 10 Euros then it fell to 5 Euros (by being cut in half relative to 2008 Euros), however the Euro suffered 110% inflation. So now it more than doubles the amount of euros you need for things compared what you used to. So we're at 10.50 Euros now in 2010.

The price is also cut in half for the dollar, but the dollar suffered less than 100% inflation, so things are a tad under than double for the dollar. So they'll be under 10 2008 Euros. Essentialyl we were paying 10 2008 Euros worth of dollars before, now they're paying 5 2008 Euros worth of dollars but they've also suffered inflation so they're paying 1.75*5 Euros= 8.75 Euros in 2008 euros. So overall it went down for them. Then we just convert those Euros to dollars but I didn't establish the conversion rate. you can do it for arbrittary conversion rate, it'll still work. A:B. it doesn't matter it'll work. Dollars will go down, Euros will go up.

So the inflation went up on both currencies, the price went down for dollars, but up for Euros. Get it, got it, good.

[agamemnus]

I majored in it. As in, M.A.

We were talking about pounds, anyway, not euros...

I was only discussing this quote, and actually I'm not really sure why Rand made it. Just wanted to make some random points, really:

Oil is priced in dollars.
Pound has fallen against the dollar.
QED Oil costs more in pounds.

Point 1 I made was that in real life, over some span of time, more than one variable comes into play. So, oil doesn't necessarily cost more in pounds if the oil price falls, too.

Point 2 I made was that the oil price actually fell, in real life, in dollar terms. It also fell in terms of pounds, because dollars/pounds went from 2 to 1.54 (77% of its value) while oil went from 129 to 88 (68% of its value) ! So, oil actually costs less in pounds (by 9% ((77-68)/77)... at least crude oil) even though the pound's value has fallen against the dollar!