Category Archives: Inflation

Interest rate rise will hit your wallet hard and cause a deep economic recession

The Bank of England: its interest rate rise will hit you hard in the wallet.

The Bank of England has increased interest rates by a huge (for these times) 0.5 per cent in an apparently inexplicable move that won’t do anything to stop the current enormous increases in the cost of living.

What can possibly have possessed the Monetary Policy Committee at Threadneedle Street to do this monstrous thing?

The bank’s own forecasters are predicting that inflation will remain above 10 per cent until at least October 2023, putting huge pressures on ordinary people.

The bank is already predicting that the UK will fall into recession this year, and the interest rate rise will prolong it – so that, in three years’ time (after the next general election, take note), unemployment is expected to stand at six per cent of the workforce – and rising.

Energy prices – the main cause of the cost-of-living crisis – are expected to fall back during this period, although the predictions don’t take this into account. The hike in interest rates will not reduce the cost-of-living crisis in any way.

And the ultimate result, as Professor Simon Wren-Lewis points out in his latest Mainly Macro article, will be to reduce inflation to a point far lower than the Bank of England’s two-per-cent mandate permits. Who benefits from that?

Professor Wren-Lewis adds that it is possible the bank expects a new Tory prime minister – whoever that may be – to introduce support for people on low incomes in a bid to stop the excessive inflation and recession.

But there is no indication from either Liz Truss or Rishi Sunak that they will do that; tax cuts promised by Truss will go to rich people and/or corporations.

And, as Professor Wren-Lewis points out,

Excessive monetary tightening based on a guess of fiscal loosening is a dangerous game to play.

Sadly for most of us, the danger applies only to the poor, working people who actually keep the economy moving.

Source: mainly macro: Why does the Bank of England appear to be ignoring its mandate?

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Why is the Bank of England trying to stop us spending when we’re already doing that?

The Bank of England: it seems, behind this imposing facade, there lurks a circus complete with clowns.

It seems the economists at the Bank of England don’t have much of a clue.

They say they have raised interest rates to make it more expensive for consumers and businesses to borrow, so people start spending less, helping cool demand for goods and services and, in turn, slowing the pace of price rises; it’s a bid to curb inflation.

But people are already reining in their spending, because of inflation!

So the interest rate increase is pointless. Right?

Furthermore, as people are choosing to save (where they can), rather than spend, the growth of the economy is slowing – which is what the interest rate rise aims to do anyway. So it isn’t needed.

In fact, it may throw the economy into reverse, sending us into a recession.

And economists have warned that increases in interest rates may have little effect given rising global oil and gas prices, over which domestic changes can have little effect.

So there seems to be only one possible reason for the Bank’s decision:

Insanity.

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UK is heading into recession – probably – as your savings run down

Consumer confidence has fallen off a cliff: will spending do the same – and, if so, will the UK economy go into reverse at the worst possible moment?

Be careful with those savings you racked up during the Covid-19 lockdowns, because you’re going to need them to ride out the cost of living crisis!

That’s the message, as far as This Writer can tell, from economist Simon Wren-Lewis on his Mainly Macro blog – and it’s as close to a prediction that the UK is going into recession as you’re likely to see.

Most economic forecasters aren’t saying it because they’re afraid to, it seems.

We know we’re looking at the biggest fall in living standards since records began in 1956-7, because of Brexit-fuelled increases in the cost of goods (including food), rising energy bills and the largest number of tax rises to be inflicted on a UK population in around 40 years.

You will be expected to use your savings to cushion this blow.

That’s fine – as long as you can be sure that the cost-of-living crisis will be only a short-term shock. But there’s no evidence that this is the case; the effects of Brexit are expected to last for decades, we’re being told to brace for another energy bill shock in October, and the Tories have absolutely no intention of reducing taxes – they want to squeeze you until your pips squeak.

With these expectations in mind, consumer confidence is flatlining:

“The GfK Consumer Confidence Index fell for the fourth month in a row to -31 from -26 in February, its lowest since November 2020, deep in the coronavirus pandemic. Readings of -30 and below have presaged recession on four out of five occasions since the survey started in 1974.” Since then the March data is available, and it’s at -38!

That’s the weakest consumer confidence since the 2008 financial crisis, and weaker than at any time during the height of the Covid-19 pandemic.

So it seems likely that spending will tail off as the year progresses, people see how the cost-of-living shocks affect their savings, and improvements in their financial position fail to appear.

As spending tails off, the economy will falter. And the Tory government has already told us it does not have any plan to stimulate growth with an injection of public cash.

So, even if you have a well-stuffed savings account now, expect those funds to run low by the end of the year, while bills and taxes remain high. What are you going to do then?

Source: mainly macro: Is the UK heading for a recession?

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Inflation is expected to hit four per cent – but is it really all down to Covid?

The Bank of England: don’t believe its claims about inflation.

The Bank of England reckons inflation will hit four per cent – twice as much as the target level – as the UK recovers from the Covid-19 pandemic.

But do we believe the claim?

The Bank of England says the increase reflects “higher energy and goods prices, which in turn reflect rising commodity prices, transportation bottlenecks, constraints on production and strong global demand for goods”.

I can understand that demand across the world for goods that have been under-produced because of pandemic-related lockdowns will push prices up.

But energy prices – in the UK at least – are increasing at a time when the companies are recording their highest-ever profits, most of which go to bosses and shareholders. Consumers are being bled dry by greed.

And what about the inflationary effect of all the money Boris Johnson has been spaffing off to his Tory friends on the pretext of awarding Covid-related equipment supply contracts, for which he’s had nothing in return?

Oh – and flags. Don’t forget the fortune the Tories have paid for flags:

The point about wages is well made. Back when This Writer was a sprog, Tories used to complain that pay increases pushed up inflation. Now it is happening after a period of prolonged pay depression.

I understand teachers’ pay has fallen at about the same rate as that of nurses.

The message is clear: any increase in inflation is due to Tory economic mismanagement. But they’ll make you suffer for it.

So if you have been able to save up some money – as many of us are said to have done while lockdowns kept us indoors, then it’s a good time to invest in solar panels for your roof. They will provide all your electricity needs and you will be able to sell some of it back to the grid.

Apart from that, keep your money in the back and enjoy the interest rate boost when it comes. Considering what the Tory government will do to you in the future, you’ll need it!

Source: Bank of England warns inflation will hit 4% this year but holds interest rates | Interest rates | The Guardian

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