Interest Rate Increase

[ks.234]

As I understand it, the logic of increasing interest rates to control inflation is to encourage people to save rather than spend.

But this rather presumes that the cause of inflation is too much spending.

Is it really the case that in a time when people are using food banks and having to choose between eating and heating, that there is an excess of spending going on?

Or are we being lied to?

 

[snowflake]

I can't answer your question, but when I did A level economics this was the theory, interest rate rises mopped up excess cash and controlled spending, hence inflation.

But nowadays no-one has a penny to scratch their arse with, so surely that model is broken. I'm still mates with said economics teacher and have asked the question, a Gaelic shrug was the response

S

 

[mandryka]

UK consumer spending jumps 10.6% in 2022 amid... | Morningstar

(Credit card spending)

People are spending less on discretionary items

The Deloitte Consumer Tracker Q4 2022 | Deloitte UK

 

[Davd]

the local pubs and eateries were rammed last weekend and have been all january-plenty of disposable funds available (or possibly the penny hasn't dropped yet...)

 

[Mike Reed]

is to encourage people to save rather than spend.

I somehow think that if you don't have enough to spend, you don't have enough to save. It's a tricky balance for the BoE, who should've acted when it was blindingly obvious that inflationary pressures had started building. Now it's catch-up, with consequences of increased gov't and private debt, recession and personal impoverishment. Even if you do have sufficient income to weather the storm and save as well, increased taxes will soon bring you down to Earth.

The global outlook now is different to that existing in similar situations previously, so it's still an uncertain future.

 

[ks.234]

The bottom line is that prices are not rising because of too much spending, but a sharp rise in energy costs

 

[MikeMA]

the local pubs and eateries were rammed last weekend and have been all january-plenty of disposable funds available (or possibly the penny hasn't dropped yet...)

Plus loads of scaffolding going up - at least round my way - and builders seem busy.

 

[mandryka]

The bottom line is that prices are not rising because of too much spending, but a sharp rise in energy costs

Prices are sticky -- reducing people's willingness to spend may mean that consumer prices come down faster, when energy costs come down.

 

[twotone]

Plus loads of scaffolding going up - at least round my way - and builders seem busy.

Building materials prices are through the roof, pardon the pun, mainly down to stock shortages, I’ve been in the trade (plumbing) for 48 years and have never seen it like this you literally can’t tell a customer when you can get stock and or start the job and the price rises are almost daily.

I quoted a customer for a job last week, he doesn’t want the job done until at least April but he paid me over half the price so that I can buy his materials right now which I’m in the process of doing but prices are all over the shop.

 

[clivem2]

I don’t buy that the traditional raising of interest rates is the correct action. All it does is hurt those who are struggling the most, it’s not as is if most people are flush with cash, whether borrowed or not. Better would be to halt the price of energy being tied to the price of gas..we are feeding profits into Shell, BP etc.

 

[MikeMA]

Building materials prices are through the roof, pardon the pun, mainly down to stock shortages, I’ve been in the trade (plumbing) for 48 years and have never seen it like this you literally can’t tell a customer when you can get stock and or start the job and the price rises are almost daily.

I quoted a customer for a job last week, he doesn’t want the job done until at least April but he paid me over half the price so that I can buy his materials right now which I’m in the process of doing but prices are all over the shop.

That's interesting.

I'm planning to have some work done to my kitchen in late March/early April, comprising a new window and side door which will require the gas boiler to be replaced and relocated. I was expecting quotes of £3.5 to £4k for boiler and associated works, plus around £4k for the window and door. The quotes for the door and window are in line with my estimate, but the lowest quote for the boiler has come come in at £2.5k and the highest is £3.5k. I don't believe the guy can do it for £2.5k and make a living. We live in strange times.

 

[martin clark]

Building materials prices are through the roof, pardon the pun, mainly down to stock shortages, I’ve been in the trade (plumbing) for 48 years and have never seen it like this you literally can’t tell a customer when you can get stock and or start the job and the price rises are almost daily.

I quoted a customer for a job last week, he doesn’t want the job done until at least April but he paid me over half the price so that I can buy his materials right now which I’m in the process of doing but prices are all over the shop.

+1; the ripple-out effects of (principally) Brexit on the UK construction industry in terms of materials availability, therefore price (and then - the c. 15-20% decline of value of GBP on top, due to the B word), and-also - definitely no less- loss of 350K+ skilled personnel who returned home to the EU as they found themselves both demonised by gammon-faced idiots, and on the losing end of a vote that resulted in a loss of right to work

All-up- an utter, utter mess.

I've mostly held my tongue on the other Obvious thread - but simple summary: utter disaster.

 

[Ellenor]

A very large proportion of the country have plenty of money and they're still spending. It's still hit and miss trying to get certain things/goods due to high demands.
Obviously the media are all doom and gloom and love telling the poverty stories, I know there are a lot of people struggling but there's a lot of people out there who aren't

 

[tiggers]

As I understand it, the logic of increasing interest rates to control inflation is to encourage people to save rather than spend.

But this rather presumes that the cause of inflation is too much spending.

Is it really the case that in a time when people are using food banks and having to choose between eating and heating, that there is an excess of spending going on?

Or are we being lied to?

Excellent post. It's like the BoE and the government can't work out that this time inflation is not caused by wage rises and disposable cash, but instead by their policies of putting essential services in the hands of private companies beholden to their shareholders (many of which just happen to be in government of course). Trouble is no one in the media seems to want to give them a hard time about it, one can only speculate as to why this is. It's a shite state of affairs frankly!

 

[MikeMA]

A very large proportion of the country have plenty of money and they're still spending. It's still hit and miss trying to get certain things/goods due to high demands.
Obviously the media are all doom and gloom and love telling the poverty stories, I know there are a lot of people struggling but there's a lot of people out there who aren't

A bit anecdotal I know, but It's often the people you might least expect who have the money. A dog walking acquaintance of mine has just spent the best part of £2m on a new house, excluding the price of the land. I'm told he drives a taxi in London three or four nights a week.

 

[Nero]

Building materials prices are through the roof, pardon the pun, mainly down to stock shortages, I’ve been in the trade (plumbing) for 48 years and have never seen it like this you literally can’t tell a customer when you can get stock and or start the job and the price rises are almost daily.

I quoted a customer for a job last week, he doesn’t want the job done until at least April but he paid me over half the price so that I can buy his materials right now which I’m in the process of doing but prices are all over the shop.

My local brickie said he was struggling to get materials because of delays in …… China. WTAF?

 

[James]

Let's not forget easy credit, even if its far from cheap, to fuel instant gratification consumerism.

 

[clivem2]

A very large proportion of the country have plenty of money and they're still spending. It's still hit and miss trying to get certain things/goods due to high demands.
Obviously the media are all doom and gloom and love telling the poverty stories, I know there are a lot of people struggling but there's a lot of people out there who aren't

I don’t believe a large proportion of the country have plenty of money, many are are close to the minimum wage. Much also depends on where people are with energy and mortgages fixes. I’m seeing a lot of hospitality businesses folding.

 

[Seeker_UK]

Inflation occurs when demand outstrips supply. The current situation is caused by supply problems, but historically, it was almost always down to demand (ie spending).

We're not being lied to, it's just that the interest rate is the only tool the BoE has to affect inflation. It will still rebalance supply and demand, but it won't be the most effective way. However, anything else would have to be a Government intervention.

 

[Minio]

A bit anecdotal I know, but It's often the people you might least expect who have the money. A dog walking acquaintance of mine has just spent the best part of £2m on a new house, excluding the price of the land. I'm told he drives a taxi in London three or four nights a week.

People with a few bob still find that an income is useful and a job to get them up in the morning and walking about.