Deflation - Establishment Myth ?

[Harlan Cage]

Governments have manipulated interest rates for decades. The BoE control of them is a relatively new innovation (from Tony Blair to pave the way for joining the Euro, if I recall).

The difference is that low interest rates no longer seem to push up inflation like it used to do (although I would argue that compared to incomes, prices already seem to be at a high level due to the stagnating wages since 2008 - plus, manipulating the spending power of home owning households (which is what playing with the interest rate does) is hardly going to have a massive effect on prices, when so much of what we need relies on foreign markets, such as oil and manufactured goods).

The other thing which isn't happening as it used to is that low interest rates aren't stimulating domestic spending, although again, this is hardly surprising given that so many of the consuming demographic have seen their incomes stagnate and employment position less secure, so they are hardly likely to splash out on a credit fueled spending spree.

I reiterate my point that the countries economy is doomed until something is done about incomes.

Spot on!


HC

 

[yorksrob]

Perhaps as we're experiencing deflation, the cost of my cuppa at Leeds station will go down.

Oh no, Surprise Surprise (It's Cilla 'ere) it's just gone up by ten pence. Funny thing this 'deflation'.

 

[broadgage]

It is beyond doubt that retail prices as measured by the ONS "basket" of goods and services have indeed fallen, but only very slightly.
If your spending DID exactly match the ONS basket, then yes your spending would have gone down, but only very slightly and probably not noticeably.

Road fuel features strongly in the statistics so non drivers have probably not experienced deflation.
Bus and taxi fares vary regionally but have been about static as an average.
Rail fares have increased significantly.
Restaurant and pub prices have been roughly static IME, basic grocery prices have fallen a bit in general.

Significant or prolonged deflation is generally considered to be a bad thing since it leads to people postponing purchases in the hope that the goods will be cheaper in the future.
Essentials like food, fuel, and basic clothing will still be purchased of course, but purchases of "nice to have" items like new furniture* tend to be postponed.
Why spend £1,300 on new furniture* now when it might be £1,200 next month ?
If enough people do this, then less furniture* will be sold, and the makers of furniture will lay off staff or close down entirely. Those thereby thrown out of work will firstly be a burden on the state through benefits, and secondly will have less money to spend on furniture* etc.

*Furniture is given by way of an example, similar arguments apply to new cars, home improvements, upgraded or extra domestic appliances, expensive rather than basic clothing, footwear, linens and so on.

 

[TheKnightWho]

Perhaps as we're experiencing deflation, the cost of my cuppa at Leeds station will go down.

Oh no, Surprise Surprise (It's Cilla 'ere) it's just gone up by ten pence. Funny thing this 'deflation'.

Expecting a macroeconomic event to impact your cup of coffee and having doubts when it doesn't is like saying global warming is a myth because it snowed yesterday.

 

[Bletchleyite]

Expecting a macroeconomic event to impact your cup of coffee and having doubts when it doesn't is like saying global warming is a myth because it snowed yesterday.

You'd be surprised (or maybe not) quite how many people seem to think that is the case...

 

[Busaholic]

I like Bonne Maman apricot jam - for years I noticed that it's 'regular' price was about 40p less than other varieties of the same brand, sometimes accompanied by 'price match' notices. There was me thinking what a lucky boy I was, until I read one day that this jam was included in the price monitoring stats. About two years ago, the price of the apricot variety overnight went up to the same price as strawberry, etc in all supermarkets, and has never fallen again. The cynic in me says this jam is no longer included in the official stats.

When petrol was going down in price virtually every week, the BBC and other news organisations excitedly brought us this info, but now it's gone up by a penny a litre most weeks, they've been entirely silent. 104.9 to 113.9, virtually a 9% increase - some deflation! I now am no longer allowed an AOL sub but have to use TalkTalk, an increase from £10 a month to £15. And everyone on this forum is aware of the falling train ticket prices, of course!

 

[MCR247]

We all know the train prices don't adjust themselves with inflation so I'm not sure how the fact they're still rising shows that the macroeconomy isn't experiencing deflation :roll:

 

[DownSouth]

When petrol was going down in price virtually every week, the BBC and other news organisations excitedly brought us this info, but now it's gone up by a penny a litre most weeks, they've been entirely silent. 104.9 to 113.9, virtually a 9% increase - some deflation!

Did you know that a frog will try to jump out immediately if you throw it into some hot water, but if you put it in cool water and gradually apply heat it will happily stay there until it boils to death?

In any case, fuel prices are an influence on national-level economics, not a symptom.

 

[yorksrob]

Expecting a macroeconomic event to impact your cup of coffee and having doubts when it doesn't is like saying global warming is a myth because it snowed yesterday.

You're quite right, and of course, my cuppa (I don't drink coffee, I take tea) is but one example.

However, I feel I have a right to be perplexed when the fabled 'basket of goods' seems to bear no resemblance to my overall experience.

 

[MCR247]

You're quite right, and of course, my cuppa (I don't drink coffee, I take tea) is but one example.

However, I feel I have a right to be perplexed when the fabled 'basket of goods' seems to bear no resemblance to my overall experience.

But surely you're aware that it won't reflect everyones spending patterns? If so, why is it so surprising that you might not be fully represented

 

[yorksrob]

But surely you're aware that it won't reflect everyones spending patterns? If so, why is it so surprising that you might not be fully represented

Well, it's annoying more than anything. Surprising probably isn't quite the word, given that I'm not particularly surprised that I don't tend to fit into the standard view of the family.

I would be genuinely interested to see how many of my friends on the forum feel that they have experienced a fall in living costs, as I have been given the impression in the media that the current 'deflation' episode has infact caused a fall in living costs for a number of people.

Naturally, I am sceptical!

 

[tony_mac]

You're quite right, and of course, my cuppa (I don't drink coffee, I take tea) is but one example.

However, I feel I have a right to be perplexed when the fabled 'basket of goods' seems to bear no resemblance to my overall experience.

A takeaway cup of tea is included in the 'basket of goods'
http://www.ons.gov.uk/ons/guide-method/user-guidance/prices/cpi-and-rpi/cpi-and-rpi-basket-of-goods-and-services/cpi-2015-basket-of-goods.pdf
Grocery prices only make a fairly small amount of the basket; the decrease in petrol prices over the last year will explain the deflation figure, even if everything else went up slightly.

 

[Busaholic]

The 'basket of goods' argument is an enduring one, and in some ways can be equated to the pop music charts of the 1960s to the 1980s - the record companies knew exactly which stores provided the data on which the charts were produced, so the pluggers were paid to induce their family and friends to go and buy 45s from these stores. Tesco, Asda and the rest certainly know which groceries and dry goods are included in the stats, so special efforts will be made to keep down these prices, particularly when we have a Tory government. Manipulation? Quite possibly, but only to be expected, and my knickers will not be performing a twist pattern on this matter.
There will probably be a few hundred people whose cost of living has decreased marginally over the year, just as there are a handful who'll have won £20.000 plus on tonight's National Lottery, but they will not be representative of the population as a whole.

 

[TheKnightWho]

The 'basket of goods' argument is an enduring one, and in some ways can be equated to the pop music charts of the 1960s to the 1980s - the record companies knew exactly which stores provided the data on which the charts were produced, so the pluggers were paid to induce their family and friends to go and buy 45s from these stores. Tesco, Asda and the rest certainly know which groceries and dry goods are included in the stats, so special efforts will be made to keep down these prices, particularly when we have a Tory government. Manipulation? Quite possibly, but only to be expected, and my knickers will not be performing a twist pattern on this matter.
There will probably be a few hundred people whose cost of living has decreased marginally over the year, just as there are a handful who'll have won £20.000 plus on tonight's National Lottery, but they will not be representative of the population as a whole.

Very low inflation is *not a good thing*. In fact, negative inflation (deflation) is a disaster as it encourages saving not spending, causing the economy to stagnate - look at Japan.

This idea that the government is manipulating things seems to also assume the government is manipulating things to show things it doesn't actually want...

 

[Xenophon PCDGS]

I think that the Japanese people on the whole were shrewd enough to realise how best they used their available money in such a period that is being described.

 

[TheKnightWho]

I think that the Japanese people on the whole were shrewd enough to realise how best they used their available money in such a period that is being described.

Of course, but when you're in a free market system people will be incentivised to save when there's deflation, as their money sits there gaining value. This can be counteracted with negative interest rates, but that massively reduces loans which also decreases overall spending in an economy. The fact that the Japanese economy had its "lost decade" shows this point better than any theorising ever could.

 

[yorksrob]

Very low inflation is *not a good thing*. In fact, negative inflation (deflation) is a disaster as it encourages saving not spending, causing the economy to stagnate - look at Japan.

This idea that the government is manipulating things seems to also assume the government is manipulating things to show things it doesn't actually want...

Even low inflation is pretty bad when wages are stagnant.

 

[Bletchleyite]

Even low inflation is pretty bad when wages are stagnant.

If there is inflation and wages do not increase annually then that is bad because you effectively get an annual pay cut.

If there is zero inflation (the perfect aim) and there is no wage increase other than for promotions, that's fine - the annual increase (where your role has not changed) is needed to offset inflation.

The trouble with zero is that it's hard to achieve, so the sensible aim is for a low positive figure.

 

[MCR247]

Very low inflation is *not a good thing*. In fact, negative inflation (deflation) is a disaster as it encourages saving not spending, causing the economy to stagnate - look at Japan.

This idea that the government is manipulating things seems to also assume the government is manipulating things to show things it doesn't actually want...

I wouldn't agree that very low inflation is a bad thing full stop. It can be a bad thing, but like most things in economics it depends on the exact causes and other circumstances. So this deflation (mainly down to low food and oil prices) isn't something to be as worried about as deflation caused by a lack of demand in the economy

 

[TheKnightWho]

I wouldn't agree that very low inflation is a bad thing full stop. It can be a bad thing, but like most things in economics it depends on the exact causes and other circumstances. So this deflation (mainly down to low food and oil prices) isn't something to be as worried about as deflation caused by a lack of demand in the economy

I'm trying to talk in general here The issue is that whilst low demand can cause low inflation, as soon as you're below 0 you run into major issues - that's unfortunately where we've just reached.

So long as the BoE keeps interest low people should be incentivised to spend their money as it's cheap to borrow; we haven't yet reached the stage where negative interest would be necessary, at which point you disincentivise the banks to lend, which is an entirely different problem (but arguably even more serious).

So if anything, if the government were faking this they'd fake low (but not very low) inflation as that's optimum - the problem with this is that all those independent economic groups who also do measures would be quick to call you out. Even aside from the central bank and the economy as a whole, there is a *lot* of money to be made from currencies as they increase/decrease in value against each other, and if the value of your currency was seen to be falsely inflated/deflated by false reporting the value of your currency would swing back to its actual value very quickly as demand/supply from currency arbitrageurs* would force this; the resultant shockwave would be far more serious than any gradual change, and the government would be very likely to be found out anyway, making this a very serious risk.


*basically, people who trade in different currencies to try and make money from their changing values relative to each other - sounds useless, but is actually the demand and supply that forces currencies to be at their correct value. They would be extremely quick to jump on any currency that was valued wrongly on purpose, either quickly selling to reduce its value proportionately or vice-versa.

 

[Peter Mugridge]

So long as the BoE keeps interest low people should be incentivised to spend their money as it's cheap to borrow; we haven't yet reached the stage where negative interest would be necessary, at which point you disincentivise the banks to lend, which is an entirely different problem (but arguably even more serious).

If people haven't got money in the bank, they won't spend ( if they have any sense ); the very low interest rates are probably in fact putting people off to some extent because they're very likely already at their credit limits - look at the high levels of credit that already show up in the statistics - and are worried about what will happen when the rates do go up.

When the Government carried out QE, they went about it the wrong way if they wanted to boost spending; instead of just buying up bonds with new money they should have used the "helicopter drop" method - if they had deposited a load of cash in everyone's bank accounts, then spending would have started again. True, half the population would have squirreled the extra cash away, but the other half would have been enough to get things going again.

 

[TheKnightWho]

If people haven't got money in the bank, they won't spend ( if they have any sense ); the very low interest rates are probably in fact putting people off to some extent because they're very likely already at their credit limits - look at the high levels of credit that already show up in the statistics - and are worried about what will happen when the rates do go up.

When the Government carried out QE, they went about it the wrong way if they wanted to boost spending; instead of just buying up bonds with new money they should have used the "helicopter drop" method - if they had deposited a load of cash in everyone's bank accounts, then spending would have started again. True, half the population would have squirreled the extra cash away, but the other half would have been enough to get things going again.

Wrt to your first paragraph - borrowing is necessary for an economy. You might have credit card debt in mind; I've got mortgages, banks loaning each other, entrepreneur loans etc. Stuff that requires debt, and utterly dwarfs credit card debt anyway. Not everyone lives in a household, and many need debt for investment, and not because they want a shiny new TV. This debt is vital for the economy to keep going, unless you want everyone to buy stuff upfront (which would cause the economy to collapse).

Your idea of a fixed income also has its own problems, but the main thing is that cash in one place is not the same as cash in another - the reason banks are given money is because the economy doesn't work on what's fair, but because it's the best way to get that money circulating again through loans etc.

 

[DownSouth]

When the Government carried out QE, they went about it the wrong way if they wanted to boost spending; instead of just buying up bonds with new money they should have used the "helicopter drop" method - if they had deposited a load of cash in everyone's bank accounts, then spending would have started again. True, half the population would have squirreled the extra cash away, but the other half would have been enough to get things going again.

The Federal Government in Australia did this, among a number of other economic stimulus measures, in 2008-09 at the height of the GFC.

It didn't work. Some people saved, some people used it to service existing debts, lots of people used it to purchase consumer goods from online retailers where very little of the money actually circulates in the domestic economy.

More targeted measures would probably be more useful - rebates and subsidies, basically.

 

[Peter Mugridge]

Wrt to your first paragraph - borrowing is necessary for an economy. You might have credit card debt in mind; I've got mortgages, banks loaning each other, entrepreneur loans etc. Stuff that requires debt, and utterly dwarfs credit card debt anyway. Not everyone lives in a household, and many need debt for investment, and not because they want a shiny new TV. This debt is vital for the economy to keep going, unless you want everyone to buy stuff upfront (which would cause the economy to collapse).

I had in mind the single large "credit card debt" figure that is often bandied about in the media - I've never really looked at the breakdown of it but because they list mortgage borrowing under separate statistics, I have taken that to mean it's only consumer credit card debt in the big figure.

Speaking personally, the only borrowing I have ever done ( apart from a couple of minor slips into overdraft ) has been my mortgage - which I made paid up 8 or 9 years ahead of term - it's still running; it's an offset mortgage, I filled up the offset account 8 or 9 years before the term ends, so I have zero payments on it and a sum in place to pay it off on redemption.

I do not have a credit card, only a debit card.

So for myself I do therefore buy everything up front, paying for it all at the point of ordering or the point of using it. If I haven't got the money for something, I don't buy it - as simple as that.

 

[Busaholic]

Very low inflation is *not a good thing*. In fact, negative inflation (deflation) is a disaster as it encourages saving not spending, causing the economy to stagnate - look at Japan.

This idea that the government is manipulating things seems to also assume the government is manipulating things to show things it doesn't actually want...

I think you've misunderstood the point I was trying to make, which was that I don't believe the inflation figures are massively manipulated: there are too many government statisticians with sea-green incorruptible records to realistically allow this to happen. Nevertheless, choosing which data to use is a political decision and can certainly be skewed. Is there anybody using the railways on a regular basis in Britain who thinks the real AVERAGE annual rise in rail fares is inflation plus 1%? If there is someone on here, then you might like to p.m. me because I have an attractive proposition regarding an inheritance I'm having difficulty in transferring from Nigeria.

 

[radamfi]

Is there anybody using the railways on a regular basis in Britain who thinks the real AVERAGE annual rise in rail fares is inflation plus 1%?

That only applies to regulated fares. Regulated fares can be restricted to fewer trains, so the people affected end up paying more than the regulated fare increase. On the other hand, Advance fares have become available on more routes, meaning that some people might be paying less if they have converted from a walk-up fare.

 

[Johnuk123]

So for myself I do therefore buy everything up front, paying for it all at the point of ordering or the point of using it. If I haven't got the money for something, I don't buy it - as simple as that.

So according to student economics you and others like you will cause the economy to collapse.

 

[DownSouth]

I had in mind the single large "credit card debt" figure that is often bandied about in the media - I've never really looked at the breakdown of it but because they list mortgage borrowing under separate statistics, I have taken that to mean it's only consumer credit card debt in the big figure.

Speaking personally, the only borrowing I have ever done ( apart from a couple of minor slips into overdraft ) has been my mortgage - which I made paid up 8 or 9 years ahead of term - it's still running; it's an offset mortgage, I filled up the offset account 8 or 9 years before the term ends, so I have zero payments on it and a sum in place to pay it off on redemption.

I do not have a credit card, only a debit card.

So for myself I do therefore buy everything up front, paying for it all at the point of ordering or the point of using it. If I haven't got the money for something, I don't buy it - as simple as that.

When I was preparing to take on a home loan a few years ago, I took out a credit card as a method of building up a good credit record for a few years before applying for a home loan.

I lived within my means, but instead of using my debit card I did as much of the same business I would be doing anyway on that credit card and paid it off in full every month.

Despite the fees, it turned out to be a worthwhile investment when I went to buy my house. My good record showed that it would be very safe to lend me money, and I got offered an interest rate which reflected that fact.

This is good if you're a person who has self-restraint and can live within a budget, unfortunately that doesn't seem to be too many people these days.

 

[Xenophon PCDGS]

I do not have a credit card, only a debit card.

I see that we share a common understanding of financial wherewithal....

 

[yorksrob]

Wrt to your first paragraph - borrowing is necessary for an economy. You might have credit card debt in mind; I've got mortgages, banks loaning each other, entrepreneur loans etc. Stuff that requires debt, and utterly dwarfs credit card debt anyway. Not everyone lives in a household, and many need debt for investment, and not because they want a shiny new TV. This debt is vital for the economy to keep going, unless you want everyone to buy stuff upfront (which would cause the economy to collapse).

Your idea of a fixed income also has its own problems, but the main thing is that cash in one place is not the same as cash in another - the reason banks are given money is because the economy doesn't work on what's fair, but because it's the best way to get that money circulating again through loans etc.

Arguably QE has been less than successful precisely because the banks haven't been as effective at getting money flowing around as they should have been, hence endless stories in the press about small businesses being hung out to dry unnecessary.

Entrepreneurial loans will take you so far, but the reality is that every economic recovery in living memory has relied on the man in the street buying shiny new televisions etc, more often than not by borrowing. The issue is that the man in the street is currently less inclined to borrow and the recovery has been sluggish to say the least.