I think it's time for a small interest rate rise

[wasabi]

TheAnimus - Whilst I agree that the "inflation" rises in food costs will lessen, it will be very much a mixed basket... if you'll excuse the pun.

1. Cereal production and stock holding may be up but many countries are stockpiling, which is lessening trade despite the price drop. Rice is the odd one of the bunch as production went down, but has been at record levels so price is reasonably stable. My guess is that many food companies who have absorbed the increases will look to benefit from the decreases, with any price drop coming from Supermarket pressure.

2. Projected decline in Russian consumption of EU Foods, especially luxury items, may have an impact but some items notably chocolate face much bigger on cost pressures (availability - climate / Ebola). In addition, luxury items are bought by people with money so there will be less incentive to cut prices. So they will probably remain reasonably static in the main, with some increasing or "size shrinking" further.

3. Fruit & Vegetables will benefit most from a reduction in oil price as it comprises a larger proportion of the production cost. However, price per Kg is also significantly affected by Food manufacturing usage. Which in turn is highly influenced by eating habits, so a lot depends on that. Still, buying unpackaged fresh fruit and veg is likely to become an even better option for the price minded.

4. Meat is a difficult one to assess as in some cases, e.g. fish and chicken, availability is a massive cost driver. In addition, changes to the legislation regarding what can go into meat products has had a massive effect on cost. A lot will also depend on levels on consumption and of what type, not just here but in places like China. It also takes a long time in most cases to adjust production to demand, so I wouldn't expect much reduction in inflationary pressure in the short term.

5. Milk and milk products are likely to go in opposite directions. Milk price is unlikely to go up any further, but whether the price will be renegotiated down is a big unknown. Milk product such as cheese are still likely to go up in price due to demand from the far east, while output remains relatively static.

Interesting figures, yet given the average UK household only spends 9.1 percent of income on food, the upward fluctuations on food prices won't affect US anywhere near as much as, say, mortgage interest rates or fuel prices jacket up by the Fuel Price Escalator. The effects in Pakistan on the other hand...

[SeriousSam]

Statistical analysis of food price changes on proportion of household spend is a minefield of epic proportions. So much so that using averages gives indications, but is far from being really meaningful. If you look at the primary drivers* you can see that some very complex interactions can take place.

*income, local location, global location, social group, ethnic group, religion, relative price of food (and the list does go on)

What really puts a spanner in the works from an application perspective is perception. Small changes in family staples or favoured luxury goods have a disproportionate effect on how we view the cost of food. These then have significant knock on effects in terms of buying habits. So not only will some groups see more or less inflationary pressure, but their perception of how bad or good it is can be wildly inaccurate. Thus even though something may be small it produces a significant response.

[The Hand]

I'd be willing to bet we will be still looking at 0.5% rates this time next year.

[Game388]

I don't mind if they increase the interest, but can't they lower the VAT back to 17.5% or even 15% like they used to?

[Saracen]

I don't mind if they increase the interest, but can't they lower the VAT back to 17.5% or even 15% like they used to?

Very doubtful. At least, not yet, or any time soon.

Don't forget, we still have, after all the so-called austerity, a £100bn/year deficit, and an ever-growing mountain of debt.

ANYTHING that lowers government revenues, and cutting VAT would, either has to be paid for by raising tax elsewhere, or by cutting spending elsewhere, or by increased borrowing, and that latter is the exact opposite of the government's central economic policy, deficit reduction/elimination.

So, when making a tax change, government has to consider who benefits? Cutting VAT benefits primarily the better off. Why? Rent and mortgages don't incur VAT. Household energy bills are on a special VAT rate at 5% and so aren't affected by a cut in standard rate. Most foodstuffs, except those classified as luxury items, are zero-rated, so you don't affect those by cutting standard rate. About the only regular major household expense that VAT standard rate does hit is petrol/diesel.

So, if you're the Chancellor and have £x bn to 'give away', and you want to do it in a way that benefits those on low incomes, you're MUCH better to do it by increasing basic income tax PAs, meaning anyone earning above £6500 pa and paying basic rate tax has, over the last few years, seen their income tax bill go down. Now, increasing that from £10k to £11k, £12k etc would give far more benefit to the low-paid than cutting VAT.

Cutting VAT might make buying a new computer, TV etc cheaper, but for any given amount the government has to give away, it targets those with real need far better by putting more disposable income in their pocket in income tax cuts than it does by reducing VAT, which is a tax paid disproportionately by the better off. If you are really hard up, you need food for the kids but can manage without a new TV.

Any future giveaways will either be welfare payments aimed at the non-working, or income tax reductions aimed at lower income earners.


And before anyone mentions 50p tax rate to 45p reductions, we all know that's about Laffer curve arguments about higher marginal rates not resulting in higher revenue because behaviour changes.

[Zak33]

I am genuinely surprised by the majority of people wanting to keep interest at it's lowest.

If we laid out a plan, right now, that it would go up a 1/4 percent every... say... 6 months for 2 years... and then be looked at.. it means we can all plan
OK I'm being over simplistic but... you almost all think it should stay down at the historic low.

Lets assume the world gets addicted to low rates.. and we NEVER come out of this global sticky syrup we're in... then what?

Do we drop to -1% and give people money for borrowing when the NEXT global collapse comes?

[kalniel]

I am genuinely surprised by the majority of people wanting to keep interest at it's lowest.

If we laid out a plan, right now, that it would go up a 1/4 percent every... say... 6 months for 2 years... and then be looked at.. it means we can all plan

We can plan, yes. But planned deflation is still very bad! We need to boost inflation somehow, not reduce it.

OK I'm being over simplistic but... you almost all think it should stay down at the historic low.

For now...

Lets assume the world gets addicted to low rates.. and we NEVER come out of this global sticky syrup we're in... then what?

Do we drop to -1% and give people money for borrowing when the NEXT global collapse comes?

Well that's one option - you don't do it at the consumer level, but you in effect charge to lend money to the central bank, which in theory encourages you to do something else with it. Quantitative easing and variants there of is another, as still currently practised by the US and UK.

[aidanjt]

We can plan, yes. But planned deflation is still very bad! We need to boost inflation somehow, not reduce it.

Uh, isn't the *lack* of disposable income the problem? Inflation simply reduces the amount of disposable income available to consumers and makes the economy worse. Why on earth would we want more inflation? Sure, it might help the government pay off more of the debt they still haven't managed to get under control, but it'll also make things worse in the long run, and increase their financial obligations, so it doesn't actually fix the debt problem. They need to fix the economy first, and deal with the debt when it's it actually becomes reasonably possible to stop deficit spending.

[kalniel]

Uh, isn't the *lack* of disposable income the problem? Inflation simply reduces the amount of disposable income available to consumers and makes the economy worse.

No. Some amount of inflation is good. The opposite, deflation, is very bad, because why buy something today when it will be cheaper tomorrow?

Why on earth would we want more inflation?

Several reasons - it encourages spending, it's a work and wage driver, it reduces debts, and most of all, we need more of a barrier to deflation in order to be able to carry out other economic influences (such as interest rate rises).

Sure, it might help the government pay off more of the debt they still haven't managed to get under control, but it'll also make things worse in the long run, and increase their financial obligations, so it doesn't actually fix the debt problem.

Inflation of around 2% will not make things worse in the long run. The debt devaluation is more than compensated for by the increases in economy and currency gains afforded by being able to safely increase interest rates for example.

They need to fix the economy first, and deal with the debt when it's it actually becomes reasonably possible to stop deficit spending.

Having suitable inflation is very much part of fixing the economy - it's one of the things the Eurozone is failing to do as well as the US/UK.

[aidanjt]

No. Some amount of inflation is good.

Can be, sure.

The opposite, deflation, is very bad, because why buy something today when it will be cheaper tomorrow?

Because you actually have money, and you want or need the goods you've been eyeing up? Just as a reasonable level of inflation in the right economic conditions can help stimulate spending, equally, in the right conditions, a reasonable level of deflation (or even just a reduced rate of inflation) can help you financially recover after a multi-decade long neoliberal spending binge, and bring the price of goods that were just out of your affordability range, into it, and therefore drive growth.

Several reasons - it encourages spending, it's a work and wage driver, it reduces debts, and most of all, we need more of a barrier to deflation in order to be able to carry out other economic influences (such as interest rate rises).

But you can only spend money if you have it. And a lot of families are struggling just to cover the basics after 7 years of stagflation eating into their disposable income. Where are these families going to magically materialise disposable income from if they're living from pay cheque to pay cheque, and their credit rating is shot to hell?

Inflation of around 2% will not make things worse in the long run. The debt devaluation is more than compensated for by the increases in economy and currency gains afforded by being able to safely increase interest rates for example.

What increases in the economy? Despite Cameron's statistics fudging and hot air belching, unemployment is as bad as ever, people's disposable incomes are worse than any time in recent history, and wages have gone nowhere but down after being adjusted for inflation. The pigeons are all too quick to declare victory, but all they've done is kick over the chess pieces.

Having suitable inflation is very much part of fixing the economy - it's one of the things the Eurozone is failing to do as well as the US/UK.

Uh, the West has plenty of inflation, it's baked right into the core of our monetary policies, it can't really do anything but inflate, even when wages are stagnant, hence the absurd economic phenomenon - stagflation. If inflation inherently fixed economies, then there shouldn't be any economic problems in countries with fractional reserve banking, much less a recession stretching on as long as it has. So clearly inflation is no economic panacea.