Interest rates to control inflation in a global village
Discussion
Morning all,
Whilst I suspect this may well end up degenerating into another left vs right political argument, I wonder if someone knowledgeable might be able to explain the technicalities to me first?
As we all know, interest rates have rocketed recently, and Jeremy Hunt has been repeating the perceived wisdom of this being necessary to help control inflation.
My simple (possibly deceptively so?) question is how does this work in a 21st century global economy?
As I understand it, the underlying logic is pretty simple - if people are suddenly having to pay a lot more of mortgages and loans that live outside the inflationary basket of goods, they have less disposable income to spend on other goods, and the crucial bit here is that this in turn puts pressure on retailers and manufacturers to keep prices - and thus inflation - lower.
Where I get confused is how this works when the vast majority of products in sectors like FMCG and white goods are now manufactured overseas?
To take one obvious example, Apple's UK sales are around $1.2Bn a year. That's not to be sniffed at, of course, but even if the whole lot was wiped out, it wouldn't exactly be a fatal hit to Apple's global sales in the region of $365Bn. Given the shortages of chips recently, it's not as though there won't be strong demand in other markets, so if UK consumers are less able to purchase, what happens? Do Apple say "oh dear, the poor Brits! We'd better drop our prices", thus delivering the chancellor's desired downward pressure on inflation, or do they just shift their marketing focus to other countries and accept selling fewer iPhones here at the higher price?
Presumably if Apple (or other global brands with overseas manufacturing that massively dominate multiple sectors of the UK consumer market) take the latter option above, the higher interest rates cause significant reduction to the standard of living of millions in the UK, but don't actually have the slightest impact on the headline inflation rate, as the cost of the sample goods making up the inflationary basket are still going up even if fewer people are buying them?
Whilst I suspect this may well end up degenerating into another left vs right political argument, I wonder if someone knowledgeable might be able to explain the technicalities to me first?
As we all know, interest rates have rocketed recently, and Jeremy Hunt has been repeating the perceived wisdom of this being necessary to help control inflation.
My simple (possibly deceptively so?) question is how does this work in a 21st century global economy?
As I understand it, the underlying logic is pretty simple - if people are suddenly having to pay a lot more of mortgages and loans that live outside the inflationary basket of goods, they have less disposable income to spend on other goods, and the crucial bit here is that this in turn puts pressure on retailers and manufacturers to keep prices - and thus inflation - lower.
Where I get confused is how this works when the vast majority of products in sectors like FMCG and white goods are now manufactured overseas?
To take one obvious example, Apple's UK sales are around $1.2Bn a year. That's not to be sniffed at, of course, but even if the whole lot was wiped out, it wouldn't exactly be a fatal hit to Apple's global sales in the region of $365Bn. Given the shortages of chips recently, it's not as though there won't be strong demand in other markets, so if UK consumers are less able to purchase, what happens? Do Apple say "oh dear, the poor Brits! We'd better drop our prices", thus delivering the chancellor's desired downward pressure on inflation, or do they just shift their marketing focus to other countries and accept selling fewer iPhones here at the higher price?
Presumably if Apple (or other global brands with overseas manufacturing that massively dominate multiple sectors of the UK consumer market) take the latter option above, the higher interest rates cause significant reduction to the standard of living of millions in the UK, but don't actually have the slightest impact on the headline inflation rate, as the cost of the sample goods making up the inflationary basket are still going up even if fewer people are buying them?
Rufus Stone said:
It only works if inflation be caused by excess demand. It doesn't work, as we are seeing, if inflation is caused by shortage of supply.
BoE should be vilified for heaping more pain on people who are already in pain.
Well, in theory higher interest rates could also strengthen the value of the pound, effectively making imports cheaper… It doesn’t only impact demand by increasing credit costs. BoE should be vilified for heaping more pain on people who are already in pain.
DanL said:
Well, in theory higher interest rates could also strengthen the value of the pound
Isn’t this the significant bit in todays world. I.e. when other countries are raising their rates (eg US, euro) then money flows into their economy / currency and out of ours. The only way to combat this is to raise our rates to stay competitive in the global money markets.
If uk interest rates were still at zero but the US was at 5% where would people invest their cash. Not in the UK and that would cause the pound to plummet and inflation (caused by the cost of overseas goods) would be even higher.
fat80b said:
Isn’t this the significant bit in todays world. I.e. when other countries are raising their rates (eg US, euro) then money flows into their economy / currency and out of ours.
The only way to combat this is to raise our rates to stay competitive in the global money markets.
If uk interest rates were still at zero but the US was at 5% where would people invest their cash. Not in the UK and that would cause the pound to plummet and inflation (caused by the cost of overseas goods) would be even higher.
Does investing cash provide economic growth?The only way to combat this is to raise our rates to stay competitive in the global money markets.
If uk interest rates were still at zero but the US was at 5% where would people invest their cash. Not in the UK and that would cause the pound to plummet and inflation (caused by the cost of overseas goods) would be even higher.
I would rather pay more for goods than more to a bank for borrowing (and I don't even have any borrowing).
fat80b said:
Isn’t this the significant bit in todays world. I.e. when other countries are raising their rates (eg US, euro) then money flows into their economy / currency and out of ours.
The only way to combat this is to raise our rates to stay competitive in the global money markets.
If uk interest rates were still at zero but the US was at 5% where would people invest their cash. Not in the UK and that would cause the pound to plummet and inflation (caused by the cost of overseas goods) would be even higher.
That one has always confused me as well. I invest - through my pensions - in companies I'm hoping will grow, not in accounts that pay a fixed rate of interest. As such, my investments perform better with lower interest rates, as those companies can more easily afford to borrow to grow their businesses. The only way to combat this is to raise our rates to stay competitive in the global money markets.
If uk interest rates were still at zero but the US was at 5% where would people invest their cash. Not in the UK and that would cause the pound to plummet and inflation (caused by the cost of overseas goods) would be even higher.
It would be interesting to know where the split is between total capital invested in stocks vs interest-bearing investments.
Kermit power said:
as the cost of the sample goods making up the inflationary basket are still going up even if fewer people are buying them?
what's not in the text book is how to control inflation in an economy almost entirely controlled by rampant property speculation and like you say, imports everything . the answer is not to focus on the inflationary basket but to look at what happens to the property market in such an economy when the interest rates hit 8%+Rufus Stone said:
Does investing cash provide economic growth?
I would rather pay more for goods than more to a bank for borrowing (and I don't even have any borrowing).
That’s quite a naive view though. It really isn’t about your or my savings rate..I would rather pay more for goods than more to a bank for borrowing (and I don't even have any borrowing).
For example, look at Turkey who saw 85.5% inflation last year. Or Greece during their troubles, or Argentina a few years ago.
The value of the currency is a lot more significant to the people’s ability to buy things than the interest rate on their bank account
fat80b said:
That’s quite a naive view though. It really isn’t about your or my savings rate..
For example, look at Turkey who saw 85.5% inflation last year. Or Greece during their troubles, or Argentina a few years ago.
The value of the currency is a lot more significant to the people’s ability to buy things than the interest rate on their bank account
Have you looked at the price of food or gas/electricity recently. Would love only 85.5% inflation.For example, look at Turkey who saw 85.5% inflation last year. Or Greece during their troubles, or Argentina a few years ago.
The value of the currency is a lot more significant to the people’s ability to buy things than the interest rate on their bank account
Wills2 said:
Andrew Bailey would have made a great kamikaze pilot so adept is he at diving things into the ground.
I wish the "Mark Carney- Smug Git" thread was still around so it's contributors could eat their humble pie. 
AIUI, interest rates make borrowing more expensive, which in turn suppresses asset prices. Assets could be houses, business investments or they could be shares.
If you look at interest rates post GFC we've been living in strange times. Banks had stopped lending as they had to deal with new leveraging rules at the same time as the sky was falling in. Investment stalled due to lack of credit. Governments acted to help increase lending and we've been living in an asset bubble ever since.
The government increased money supply via QE at a similar rate to the demand for more money, so we didn't see huge inflation.
The value of a currency, like anything, is relative and if assets are deflating then a house will cost 400,000 loaves of bread/litres of petrol where it used to be worth 500,000. The government needs to increase the value of the pound relative to these assets.
Typing this actually makes me nostalgic for the GFC and all the technocratic debate we'd have berore all the post-brexit populism stuff.
Rufus Stone said:
Have you looked at the price of food or gas/electricity recently. Would love only 85.5% inflation.
Think you must be trolling now 
Food has not gone up by 85% and nor have the rest of the items in the basket barring gas and electric which have gone up by the same amount in every country.
But you do need to recognise that if the pound had also halved in the last year relative to the dollar, they would have gone up even more than that as fuel is dollar based.
If you think you really would “love only 85.5% inflation” then you really don’t understand what you are asking for. It would be calamitous for huge swathes of society and people would be in a very bad place. Much much worse than the current pain. You wouldn’t wish it on your worst enemy.
fat80b said:
Think you must be trolling now
Food has not gone up by 85% and nor have the rest of the items in the basket barring gas and electric which have gone up by the same amount in every country.
But you do need to recognise that if the pound had also halved in the last year relative to the dollar, they would have gone up even more than that as fuel is dollar based.
If you think you really would “love only 85.5% inflation” then you really don’t understand what you are asking for. It would be calamitous for huge swathes of society and people would be in a very bad place. Much much worse than the current pain. You wouldn’t wish it on your worst enemy.
I don't believe the claimed headline inflation. I do believe the money I have to pay out each month to live.Food has not gone up by 85% and nor have the rest of the items in the basket barring gas and electric which have gone up by the same amount in every country.
But you do need to recognise that if the pound had also halved in the last year relative to the dollar, they would have gone up even more than that as fuel is dollar based.
If you think you really would “love only 85.5% inflation” then you really don’t understand what you are asking for. It would be calamitous for huge swathes of society and people would be in a very bad place. Much much worse than the current pain. You wouldn’t wish it on your worst enemy.
Rufus Stone said:
I don't believe the claimed headline inflation. I do believe the money I have to pay out each month to live.
That was the thrust of many economists and pundits; CPI was the bulls
t version of RPI and was woefully inadequate. That and BoE printing money stoked one hell of a speculative ‘investment’ party bubble.IME: Big party = big hangover.
That, in simple terms, is it. Anyway, rates are nowhere near historic highs.
You have to distinguish between a price rise of a given product and general inflation, otherwise we'd see triple digit inflation in flights and hotels just about every school holiday. Inflation is a generalised rise in prices, or put another way a fall in the value of the currency.
To answer the OP:
The mechanism by which interest rates govern inflation is basically higher rates make it more attractive to hold pounds (to both domestic and foreign holders) so push up the value of the currency relative to the goods you might buy with it,il including dollars, euros and other currencies. It doesn't really matter where the goods are made. For each rise in interest rates people will choose more pounds over ipads. It won't affect the global price of ipads or even the domestic price in terms of gold/dollars or whatever else but if it is unattractive to hold pounds people will swap them for other things.
Since 2008 with interest rates at practically zero pounds have been so unattractive that people have borrowed them in order to swap for goods. In isolation this would lead to hyper inflation and the currency collapsing. Because every other major economy was in the same boat we didn't see that so much.
To answer the OP:
The mechanism by which interest rates govern inflation is basically higher rates make it more attractive to hold pounds (to both domestic and foreign holders) so push up the value of the currency relative to the goods you might buy with it,il including dollars, euros and other currencies. It doesn't really matter where the goods are made. For each rise in interest rates people will choose more pounds over ipads. It won't affect the global price of ipads or even the domestic price in terms of gold/dollars or whatever else but if it is unattractive to hold pounds people will swap them for other things.
Since 2008 with interest rates at practically zero pounds have been so unattractive that people have borrowed them in order to swap for goods. In isolation this would lead to hyper inflation and the currency collapsing. Because every other major economy was in the same boat we didn't see that so much.
Rufus Stone said:
mike9009 said:
So your shopping basket each week has nearly doubled in price since last year?
Not far off. Anyway students of economics will know that we are in a similar position as around 1990. Which then caused a recession, which reduced demand, lowered prices, stagnated housing costs.
There’s too much noise from political commentators with conflicting views as to what to do meaning that a bit of everything is done badly with the predictable outcomes
mike9009 said:
So your shopping basket each week has nearly doubled in price since last year?
I'm one of those sad individuals that keeps a spreadsheet that tracks all of our household expenditure. I start a new one each year. The 2023 version shows that we're spending about 15% more on groceries than in 2022. There's been no change in our circumstances or shopping patterns.Rufus Stone said:
mike9009 said:
So your shopping basket each week has nearly doubled in price since last year?
Not far off. But she said she’s saving quite a bit (she said typically £15-£20 to produce a £130 bill) by taking advantage of various offers. A few times she’s physically shopped in M&S and the offers don’t seem to be there or aren’t as obvious, so it’s noticeably more expensive.
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