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Rate shock

Robert Peston | 16:50 UK time, Monday, 9 June 2008

Short-term UK interest rates surged by an almost unprecedented amount today - by between 0.3 and 0.4 of a percentage point depending on maturity and instrument.

How can this be at a time of economic slowdown? Well it's all about surging inflationary pressures - from rising energy and food prices - and the expectation that the Bank of England is more likely to raise interest rates than cut them in the coming months.

The trigger today was those quite dreadful stats on the increase in what manufacturers are paying for materials and what they are charging for their products - coupled with the delayed effect of last Friday's remarkable jump in the oil price.

What does it mean? Well it presages further rises in mortgage rates, since the most popular fixed rates are linked to the so-called two year swap rate, which rose by 0.3 of a percentage point today.

Perhaps the best that can be said of today's interest rate surge is that the markets are doing the work of the Bank of England for it, without the need for the MPC to come off the fence and actually raise the policy rate - as and when mortgage rates rise further, homeowners will become even more lugubrious, consumer spending will be squeezed even more, and perhaps some of the inflationary pressures won't materialise as actual increases in consumer price inflation.

But these are microscopic crumbs of comfort. With every hour that passes, the manic depressives who have been warning of a return to an era of stagflation - a growthless world of rising prices - seem more and more sane.

Comments

  • Comment number 1.

    I told you all I was right... Did you listen?

  • Comment number 2.

    Thank you for endorsing the state of my mental health.

    I have feared for some while that we are going to have to face a replay of the Seventies but without the flares and the tanktops. This was a truly dreadful period with rising prices, no growth and powerful groups of people seeking to grab as big a share of the cake as they could. Everyone lost out in the end.

    I hope I am wrong but in the absence of any imaginative initiative from the Chancellries of the West, the only alternative seems to be a slump which would be a whole lot worse.

  • Comment number 3.

    Just how bad is this going to get?
    I don't believe many commentators have a good enough imagination.
    There is no good news to be heard anywhere.
    I could write a book (and am contemplating it) on whats gone and going wrong.
    One thing is for sure house prices are going to fall a long way, because apart from anything else, they were too expensive to buy when 110% mortgages and cheap interest rates were available.
    How far have they got to fall to become affordable, now that only 90% mortgages are available at greater interest rates AND MUCH MORE IMPORTANTLY borrowers have got too prove beyond all reasonable doubt that they can afford the repayments?
    Yes we have had 10 good years where incomes have increased and government tax revenues have increased, mainly on the back of rising house prices, but nothing lasts forever.
    In spite of record tax takings Mr Brown has still been able to spend it all and more. Much of his tax take has been paid for by people remortgaging their homes as house prices continue ever upward. NOW how are taxes going to be paid.
    Mr Brown ran the economy on the basis that house prices would rise forever, Banks lent money on the basis that house prices would rise forever. The credit crunch happened because the people that mattered assumed that house prices would rise forever (really!! can someone tell me how incompetent this was)
    Considering Mr Brown is such an allegedly intelligent man I can't understand how he spent so much money when a man in his position SHOULD have considered it PRUDENT to reign in spending on the assumption that house prices wouldn't rise forever.
    Had something been put aside by mr Brown when times were good, then presently the government itself would have been able to assist its subjects with the current commodities problems.
    It can't because not only has the government spent and committed to spend all those large revenues, but it has also borrowed as much as it can already to spend even more.
    Bank of England can't stop stagflation and nor can the Government because it has no money to help. It wouldn't have needed that much money to make a difference. Just a little bit of care with government spending would probably have made all the difference.
    I'm sure an attitude of aren't I doing well look how much money I've spent on the public sector now, is already being regretted. Actually probably not a smidgeon of regret.

  • Comment number 4.

    this is probably an economics 101 question .. but why does there need to be economic expansion anyway?
    Can't businesses get by, not growing their sales, and market cap?

    Anyway ..feels like we are heading up sh*it creek without a paddle

  • Comment number 5.

    My money would be on deflation. I cannot see them being able to stimulate demand. Nobody has the money, nobody can borrow more, and Bank rate acts as a signalling device to prevent wage inflation.

  • Comment number 6.

    We are going to get the triple-whammy.
    1...senseless balloon of house prices, causing banking collapse, and business collapse.
    2...oil on the march again.
    3...the return of the militant unions, and their huge pay demands (yet to happen).
    Numbers 1 and 2 will cause no 3.

  • Comment number 7.

    #3 forfuturessake, how bad will it get?

    My guess is between 1929 and 1973, within two years from now, lasting seven. Mr Bernanke knows a great deal about the 1929 depression, so it wont repeat, but not enough about the next one, as other variables have entered stage. They would have done a bit better if they had dealt exclusively with the economics. Instead, politics has affected their decisions as they have tried to keep too many crony capital interest groups happy. But you never know. These guys are clever. Some are too clever by half.

    My guess is that here we have a few more problems. Mr King seems to be rising to the occasion. But our politicians are desperate for votes. Our real economy is in bad shape.

    My guess is that the US has the same problems but its weapons include its entrepreneurial culture, spirit of innovation, manufacturing base, tough approach to fraud, and bold policy-makers. They try to learn how to ride the bronco whereas we tend to cling on. And they have lower percentage deficits. Of course it is still the great world economic empire whatever people may say about the bright BRIC future. Under the mighty protective wing of the US defence budget Europe has been able to indulge the luxury of its social engineering and welfare experiments for the past half century.

    My guess is that everyone is holding the dollar and is reluctant to get out of it because they would take a haircut. Everyone will be relieved as the dollar recovers. Not so with the pound. We must keep rates reasonably high or everyone will sell the pound.

    So my guess is that the US is in much better shape than we are … yet things are not so marvellous there.

  • Comment number 8.

    Robert, I think you owe it to us to explain just how bad this could (or dare I say, will) get. Is it just me, or are there signals every day that seismic economic and social forces are at play here? Oil is running out (admit it BBC!). The end of cheap energy has good and truly arrived. Other precious minerals and materials are being demanded and consumed faster than mother earth can supply them. The earth's population is exploding. The world's financial systems are in disarray. The old world order is under threat like never before. Where on earth is all this heading? For me, I'm assuming that the Mad Max scenario is a looming reality and am taking steps to protect my family and me from the worst case downside (I'm an ex-military guy with 20 years service, so maybe this isn't surprising). I think it's about time somebody (the BBC? the politicians? industry leaders?) started telling it as it is and enabling the good people of this messed-up country of ours (thanks to the Blair/Brown Terror) to prepare themselves for what lies ahead. C'mon Robert ... start giving it to us straight.

  • Comment number 9.

    The bottom line is no-one has the slightest idea what is going on. Not the politicians, not the bankers, not the investors.

    Try answering these questions. These form the foundation of the economic immediate future:-

    On the last trading day of 2008, what will be:

    1. The Price of oil, to the nearest 10 Dollars.

    2. The price of gold per ounce to the nearest 20 dollars.

    3. The dollar/sterling exchange rate to the nearest 5 pence, likewise the dollar/euro and euro/sterling.

    4. The LSE to within 50 points and the Dow Jones to within 500.

  • Comment number 10.

    Robert, you omit to mention that much of the so-called "growth" of recent years is funded by debt. How can debt be taken as growth. Growth is sustainable, debt is not - it has to be paid back.

    House price rises are not profit either: real profit is only there when you sell something, and is not created by an estate agents evaluation.

  • Comment number 11.

    I can't help wondering what Britain still has going for it any more, and what it can offer the world.

    We are told the City is the centre of the financial world, but all our wonderful bankers have been shown up as being greedy and incompetent.

    We don't have any natural resources left, and can only produce about half the food we eat.

    We don't have any manufacturing to speak of and our workforce is expensive compared to Asia.

    All we have is debts, high taxes, huge public spending, and a depreciating stock of housing.

    We used to have an identifiable culture and set of values, and a free society. We don't even have those any more.

    Where do we go from here? Downwards I fear.

  • Comment number 12.

    I purchased some cooking oil today - last time I did so (a little over a month ago say six weeks) I paid 69 p/l today it was £1.19/l. This is a 72.5 % increase! (Both at the same Asda) Hold on to your hats the ride will get very bumpy!

    The synthetic money (derived from synthetic financial instruments) has left property and moved into commodities (i.e. oil). I am at a loss to explain why cheap cooking oil has also gone up - except perhaps to dissuade us from adding in to our diesel cars!

    Some day the old fashioned 'science' of controlling the money supply, not just controlling interest rates, will, I predict, return to the fore in the economic management echelons of the state.

  • Comment number 13.

    I can't believe it has taken this long for a lot of people to realise that the whole economy has been built on debt. I work in financial services and it amazes me the amount of times I have come across clients funding their lifestyle through the supposed growth in the value of their property. Time and time again they have remortgaged to take out equity to buy cars,etc or pay off debts built up in the last couple of years. Unfortunatley now their time has run out and falling house prices and rising rates are having an impact on people who have been living their life beyond their wages or means. Alot of the blame must lie with the lenders but at the same time if you act irresponsibly with your own finances then the blame must lie at your dooor as well. A deadly combination!

  • Comment number 14.

    Hold on a minute, that can't happen. Things are different this time. We have long term stability based on prudence and historic low interest rates and unprecedented growth in employment.
    Our friends in Russia will provide us with all the cheap gas we need and we can airfreight food from the third world at a fraction of the cost of growing it here.
    If things get a little bit difficult we can all take a cheap flight to our holiday homes to chill out a bit.

  • Comment number 15.

    Don't worry about the increase in the costs incurred by manufacturing industry, we can import it all from China. Britain has a flourishing service sector which will soak up any amount of redundant manual workers.
    Judging by the number of people who accost me on a daily basis to attempt to get me to change gas/electricity supplier or mobile phoner provider these two markets are in a very bouyant state.

  • Comment number 16.

    Look on the bright side, if we get stagflation we can all hunt stags

  • Comment number 17.

    Big issue sir ?

  • Comment number 18.

    By 2009, once Labour decides to buy all the empty flats to help the sellers and rent them to needy people, we will have gone full circle. From sick man of Europe to big spenders and back again in thirty years.

    Maggie allowed council estate dwellers to buy their own houses, creating pride of ownership and offering a first step in the development of personal aspirations in those battling to keep their heads up high. Since 1997 Labour has managed to plunder the capital base of the nation, destroy belief in the family unit, obliterate centuries of an evolved educational system, and threaten the rule of law with Brussels diktats.

    And untaught the populace about the virtues of home ownership, replacing it instead with the cynical (and deluded) view that they too could have their own source of unearned income.

    Usually Labour is lucky to last a single term before they are shooed out of the halls of power. This time, in 1997, they lulled our suspicions with a conjuring trick: we are not true Labour they said to some, yes we are still true Labour they said to others, with a crooked smile, talking out of both corners of the mouth. So they have lasted more than a decade.

    While we imported problems in the financial economy, Labour was fully responsible for the worse problems in the real economy. My concern is not Mad Max but feral, illiterate youths, who are going to be bewildered at the disappearance of the gimme culture that has sustained them since birth. My other concern is the mayhem Labour will cause before they go.

    Then we must keep a watchful eye on the Tories.

  • Comment number 19.

    When are you all going to listen. We are fighting wars in Afghanistan and Iraq, wars which we cannot afford. I consider that OPEC are conducting an economic war against us which they will win. I know of no war where inflation did not result. Tell me if anybody knows of one, the war on terror is no different.
    There is just too much money circulating. With excess money chasing fewer goods what do you get, inflation. Many have said that monetarism is dead. Well some of never loss the faith. Cash is king.
    So, come on all you highly paid BBC economists, get your act together, we are all up the swanee river without a paddle. Proof, how much are you being paid to actually tell us something without ever coming up with solutions. Have you ever really actually worked? thought not!
    As for me, what needs to happen? Well the evil day has been put off for so long that the remedy will prove to be very painful. Cut the money supply, bring in price controls, reduce wages, increase taxes, enter the Euro. Oh, and have a revolution.

  • Comment number 20.

    It's quite obvious what's going to happen. Inflation. The government is going to print money.

    The BoE remit is going to be 'reworked' again just like it was when the RPI was changed to CPI for the sole reason of keeping the ballooning cost of housing out of inflation figures and so justify keeping interest rates artificially low. Laughable really that some left-wing think-tank (now there's an oxymoron) is now talking of removing things we have no control over - like oil prices and electricity prices from CPI. Once again purely to justify keeping interest rates artificially low.

    What about things we do have control over - like how much we pay for our houses? Why weren't you clamouring to shove them in the index back in 2002 when this catastrophe might have been averted?

    You can be sure the BoE remit, which we must remember, was pointedly reiterated to the house during the course of the last budget speech, was to control inflation, is about to be re-jigged to allow rates to be cut. What was the purpose of so pointedly re-iterating their remit even while the wheels were coming off Gordon's economic miracle to then three months later go and change their remit to some waffly broader economy remit?

    This government will do one of two things. The writing is on the wall so Von Brown may be deliberately engineering a crisis of confidence in the government over this 42-day thing so he can go to the country knowing full-well he'll get a P45 by return of post. Thus meaning he'll be out of office come the inevitable recession caused by his policies. Plus, inevitably at some future point, some clown will immolate himself and a dozen or so tube passengers again and Brown will claim with a straight face that it was only the nations rejection of his 42 day detention rules that allowed such an outrage to occur. I certainly wasn't thrown out for my economic mismanagement. No sir. Not me. Prudent to the end.

    Either that or he will simply borrow massive amounts of money and hose it through the economy. GDP will hold up because of massive government borrowing and inflation and so he'll avoid a 'technical' recession even as he trashes the economy even further.

    Finally he'll get voted out in 2010 and if the Tories dare to try and fix the situation they'll have the Labour hyenas leering at them as the inevitable recession finally bites.

    So, sadly for all of us it's a 'Heads I win, tails you all lose' situation for Gordon Brown.

    He will have totally trashed the economy and have us in hock to our eyeballs but either way he'll engineer that the Tories are in power when the technical recession actually occurs. Either by going to the country early under some pretext - 'Ask the electorate to endorse my leadership - blah blah' or by rigging the GDP figures till the last possible date in 2010. Watch for alternate quarters of near zero GDP growth followed by attrocious GDP declines thus avoiding the technical definition of two consecutive quarters of negative growth. Easily engineered by staggering the dates at which corporate tax receipts get submitted to the exchequer and large PFI payments get made.

    And the ultimate humiliation for all of us is that he'll get wiped out by a disenchanted electorate but still cling to the delusion that he's the best chancellor/prime-minister in history. Ever. And many Labour voters will actually believe it.

  • Comment number 21.

    It does currently look very much like stagflation doesn't it.

    However, an inflationary blow off just before recession takes hold is entirely consistent with deflationary episodes of the past.

    I think for stagflation to persist you would need workers to be able to increase their wages. If not, this sort of inflation will suck real purchasing power and demand out of the economy.

    That would then feed back into commodity prices to add to the deflation of the credit bubble.

  • Comment number 22.

    After 10 years of NuLabour stewardship the British economy could be summed us as "clunk". Someone has really made a "fist" of it, who should we blame?

    The next question is where do we go from here? Having hosed money in all directions to little or no effect long term benefit someone is going to have to clean up.

    What a mess this country is in, "Please leave it as you found it"clearly doesn't apply to this disfunctional bunch of incompenents. I'm feeling thoroughly Browned off.

  • Comment number 23.

    #10 What I think you're missing is that growth and debt aren't opposites: they are the same thing. There can only ever be sizeable growth, all things being equal, if people are prepared to borrow. I've heard that if you take away the amount that has been borrowed then the economy has been shrinking, in terms of production and exports, by 30 billion a year. So I've heard.

    But something that is fact is that Bear Stearns traded at $170 a share and was sold now for $10. And the debt is underwritten by the government so it really is money for nothing. If half the depreciation or even a quarter of the depreciation of Bear Stearns' value is applied to the 'real' economy then you will have massive, massive problems and #6 militant unions will be the least of the problems.

  • Comment number 24.


    According to my information LIBOR rate for was fixed at 11am on June 9th, at 5.09125% an increase of 0.034% - I dont know which rate you are referring to but my figures are 'overnight rates'.

    Your report seems to be based on a 0.3% increase, as opposed to the 0.034% listed. (10 times the actual amount?)

    The cumulitive monthly change in LIBOR for June up to 11am on the 9th was (including yesterdays rise) a reduction of 0.23%.

    Either I am missing something here, or you are not quoting the overnight rates as at 11am June 9th.

    More media doom and gloom I wonder?

    source: BBA.

  • Comment number 25.

    Our political and economic masters have but two choices, recession or inflation. In order to protect the nerves of the milder mannered, nervous souls amongst us, I'll leave out the dreaded stag/slumpflation.

    As has been mentioned so often, our inability to live within our means has resulted in millions now up to their necks in debt. As there is no chance of this debt ever being repaid, and as civil disorder must be prevented at all costs, there is only one way to crawl out of the mire.

    Inflation ! Secretly beloved by streetwise politicians, this is THE way to get rid of all those nasty debts.
    We are now going to enter a period of double digit (sounds familiar) inflation, lasting for Gawd knows how long.
    While inflation gallops along at around 10or12% (or more!!) those of us who actually have savings, will be lucky to be getting 7% on our money. This means in effect that the prudent will pay off the debts of the feckless.
    Sounds far fetched.....just ask anyone whos been around a few years (old codger like me),they'll soon put you straight.

  • Comment number 26.

    The crazy part of this for me is how could we not have seen this comming? About 2 years ago the housing market began to stall but the industry (estate agents, lenders etc) just found more ways to loan more money to keep it going as the foundations got shakier.

    We lived further and further beyond our means with less and less attention paid to the risks being taken. In short, we lost site of the value of money as it was so easy to get credit. Now, the housing market had to stall - once prices began to slow and then fall, lenders become more nervous hence prices fall, easy mortgages for 100% + dissapear and on... and the housing market was the biggest factor in making people 'feel' richer.

    Another issue in my opinion will rapidly become unemployment. As businesses see their 'target' profit levels become unacheivable, cost cutting will begin in earnest. Remember the '10 good years' have meant businesses expect high profits that keep increasing to satisfy shareholders and maintain their margins, hence they will do more work with less people.

    The subject of inflation is more tricky - running above the preferred measure (guessing it's about 3.5% now and rising) the BoE is trapped. They cannot cut interest rates, in fact they will now most likely have to start raising them again to try and reign in inflation growth - but that will slow the economy further. If they don't I think we will see inflation at 7 or 8% by year end.

    We need to face the good times are over, now we face a period of 'readjustment' that is really going to hurt

  • Comment number 27.

    REDLENIN #9

    1) $170

    2) $840

    3) 55p to the dollar / 80p to the euro

    4) 6100 and 14000


    The traders and professional investors will have an amazing Christmas and New Year whilst 100 million children will go to bed starving and everyone else in between will be a little worse off. Merry Christmas!


  • Comment number 28.

    RobertCuk, the article refers to the 2 year swap rate, not overnight LIBOR. They are two very different things.

  • Comment number 29.

    And when we're all struggling to meet our basic living costs there'll still be those out there castigating us for talking the market down.

  • Comment number 30.

    The price of oil has gone up - some short term external factors, but a good thing in the long term as we need to be weaned off oil.

    The price of food is going up, again in some ways a good thing as it could help some western people to eat healthier diets.

    The banks are getting back to normal, slowly, but they will get there, barring further accidents.

    Lending is back to a sensible level, thats a good thing.

    The credit impact will work it's way out, huge bad debt provisions are in place and people will focus on debt reduction.

    House prices will return to sane levels and there will be some negative equity, which again will work it's way out of the system.

    The world chancellors will work more closely together and be more viligant at doing their jobs.

    I hope that the Government start reducing spending and reducing their borrowing.

    The media is making it worse, pushing things faster downwards - and will shortern the economic cycle.

    There will be some inflation and we may have to spend a little less, for a period (mainly fuel and food driven).

    The Government have given huge amounts of money to education and health - I wonder if they have invested this money wisely.

    The net impact will be less than we think, the media will have a field day, they built up the price of houses and then knocked them down, they will do the same for the economy. Suiddenly they will find it wasn't as bad as they had thought it was.

    In November we will have a new US president, that will be a great thing, we should expect that will be the start of the recovery period.

    Ecomonic cycles are shorter today, markets always over-react, normality will be redefined.

    So another flat year, some positive signs at the end of the year and some good news in 12 months time, but in a more controled way.

    What do we think????

  • Comment number 31.

    The BBC seems to get off on scaremongering. 23000 people in negative equity, wow, out of 20 million households!

    The most likely prognosis is that sooner or later the oil / commodities bubble bursts, just like the property and dotcom bubbles.

    The biggest risk two years from now in the UK is deflation, as banks overshoot on the caution just as they overshot the excess lending.

    The MPC should be reducing rates slowly now, to prevent the need to slash them later. Meanwhile, come on BBC, you're not the Daily Mail, so don't get hysterical.

  • Comment number 32.

    The two year swap rate has gone up for one reason and one reason only. People now expect the next move in interest rates to be upwards rather than downwards and them to stay higher for some time.

    Three months ago a suggestion that bank base rate would be 4.5% at year end was seen as towards the top end of expectations and a rate of between 4.0% and 4.25% being closer to the mark.

    Now with inflation appearing to be out of control upwards I expect at least one rate increase of 0.25% and possibly 2 taking the base rate to 5.25% or 5.5% by year end.

    I agree with many of the posters above I think stagflation, a possibility I put forward over six months ago, now to be more likely than not.

    The bank base rate should have stayed fixed to RPI and not CPI so a gentle tightening of credit should have occured 2 1/2 to 3 years ago and many of todays problems would not be here.

    I fully expect RPI to be over 5% at the year end plus base rates at 5.5%.

    The really worrying thing is does anyone have any confidence in Messrs Brown and Darling to be abel to steer us safely through these stormy waters?

  • Comment number 33.

    We had the Great War, World War I, we then had not Great War II but we did have World War II. I think the politicians and economists are living in cloud cuckoo land. We are about to have Great Depression II, not matter what you call it. All the signs are there. Rising wheat prices in 1927 led to over-production in 1928 which led to massive falls in prices. The banks called in the loans and we know what happened next. The collapse of an Austrian bank, Credit Anstalt is replicated now all over the world by banks collapsing or asking for more money to shore up their balance sheets.
    Keep your heads in the sand but don't tell me you didn't realise how serious the situation has become. Keynesian economics will not save the world economy. The truth is out there.

  • Comment number 34.

    @27 finbinfin.

    Interesting guesses finbin. You see the LSE rising less than 5% on today, but the DJ rising around 7%. You see gold falling but oil rising and the euro/USD/sterling rates remaining largely unaffected.

    Stagflation/slump then in your analysis?.

    Anyone else care to try and answer #9 ?

    Particularly any of you financiers/bankers out there?

  • Comment number 35.

    All those people forecasting house price falls will continue really need to take a look at rental prices. These are soaring (in the South East at least) as the shortage of homes still exists. A falling housing market can only be maintained when both prices and rents are tumbling due to a glut of homes.
    Sooner rather than later those who can afford to buy in the absence of 100% mortgages will be snapping up property so fast prices will be on the rise again.

  • Comment number 36.

    To no. 35 please note the following. Yes people are renting but there are still thousands homeless. So, why don't councils buy the properties which have been built on some very nice estates. Now these could be used for housing associations or social housing to put the homeless in.
    Now there is a problem because the people who bought the expensive houses may not appreciate having people living on their nice estate who are either housing association or social housing tenants.
    Now in that scenario what do you think will happen to house prices, rise or fall? Answers on a postcard please. I think they may well fall even further, refer no.33, can't wait for GDII.

  • Comment number 37.

    Back to the 70's. That's how it is beginning to feel, from someone who remembers the first time round - it does all start to look very familiar. Inflation is much higher than the published rate when you look at the cost of food, fuel and utilities it is more like 15% - 20% on a purely subjective basis. At least in the 70's we had pay rises to match!

  • Comment number 38.

    #34 Redlenin

    I guess I went for somewhere around the average for the last 12 months on LSE (ie stagflation?) but with tax rebates and a presidential election I expect the gloom to clear in the US if only temporarily. Amateur guesswork/reasoning but oil can only go one way- which could reduce demand for other commodities (metals) as higher prices lead to lower demand for the goods that are made from them (electronics etc). But then again what if Americans go out and spend? Or if continued turbulence makes gold look a good short term safe option?

    Conflicting pressures on interest rates (voters with mortgages versus inflation) may mean rates stay roughly as they are therefore little variation in the exchange rate.

    Help please from the pros!!

  • Comment number 39.

    So when the Commodity price Bubble bursts how many spreadbetters and cfd people will lose their shirts !

    Last on to sell is a rotten egg !

    More seriously, the British Public has been lied to since maggie, about Inflation for many many years.

    The real rate of Inflation has been running at 7% to 12% for the last ten years.

    Of course redefining the Index RPI then CPI then something else, has proped up that lie for a long long time.

    Time to have an honest Government !

    Trouble is, none of the Parties are worth voting for.

  • Comment number 40.

    Of course if the Official rate of Inflation is accepted to be 8% (factory gate inflation) then those people who bought property as an investment (and if they hold on) will feel very smug in five to ten years time!

    Of course looking at for example Zimbabwe which has runaway inflation, it is possible to see how raising Interest Rates to quell demand actually does not work to lower Inflation.

    Raising Interest rates alone will not reduce international commodity prices.

    There are many other economies bidding for resources.

    And they do not depend on Britain to regulate their demand.

    They will just buy what they need at whatever price they are prepared to pay.

    If Britain cannot afford to match their bids then the price won't lower just for us!

    Britain will simply lose out.

    Prices will stay high for the products affected by the high commodity prices.


    Assuming this isn't a Gamblers bubble, created by the Spreadbetting firms gathering amateur betters under their wings.

    Spreadbetting and CFD's should be limited to professional investors not Joe Public on the Street.

    Amateurs are quite happy to create Bubbles hoping to bail out first.

    They do not consider the possible effects of their actions and nor do they care.

  • Comment number 41.

    No 28 - cheers and many thanks

  • Comment number 42.

    No:28 - if its ''2 year swap'' - I am not qualified to know what that actually means; but these journalists have been banging on about the LIBOR rate - as soon as that falls into line (or nearly) - they seem to get alarmed about something else!

    2 years sounds like a lifetime away - especially in these uncertain times.

    My basic response to this report then is ''who knows what 2 years will bring'' - it could even be a just a spike. I guess we will see!

  • Comment number 43.

    We're heading for unchartered waters and the whole world is going have to change its dependency on oil. Every price increase in life is linked to oil or the lack of it and as demand grows from more developing countries how can things ever get any better? Sooner or later we are going to have accept nuclear power as the alternative, we are at a turning point but unfortunately its going to be a very stagnant and slow change. An economy can be designed to run on nuclear power however great changes will be needed in transport, maybe electric railways will have a huge role in freight transport on land and what oil can be grown from crops will get eaten up by planes and ships. I think this is the beginning of the end for the world as we know it, maybe now we'll be forced to change and maybe for the good

  • Comment number 44.


    Good report from Robert as usual and some very good responses, as usual.

    I agree with all the sentiments but next time you are interviewing the supermarket chiefs Robert, please ask why beer and larger and wine are coming down in price when the supermarkets claim that transport and raw material costs are the reasons behind the massive food price rises. Does beer, lager and wine get to the shops by solar powered trucks ?

    can anyone answer the question please ?

  • Comment number 45.

    @44 - The reason beer lager and wine are coming down in price is two-fold.

    1. Last summer's disastrous weather.

    2. England failing to qualify for Euro 2008.

    The major brewers have been left with rather a lot of stock that they have got to get rid of to make storage room for fresh brews for this xmas and next summer.

    About the only decent thing Steve McClaren has done.

  • Comment number 46.

    @ (45 ) 1/ Last summer 2/ Euro 2008

    Sorry Red Lenin. I dont buy either excuse you offer !

    1/ Its a long time since beer had sell by dates that long and equally the "bad summer" would have affected the growing of brewing crops !
    2/ Euro 2008 problem would be overtaken by all those complaining they cannot now afford to eat out or go to the pub because of Browns taxation theft and who now stay home with supermarket drinks

    It would be interesting to see what the BBC economic experts view is ? It seems to me that the supermarkets have taken the opportunity to ratchet up prices for must have food products and taken advantage of the constant bad news on oil prices.
    Perhaps a good time to bury bad news ! A "JM" moment perhaps, or am I just cynical


  • Comment number 47.

    #40

    Are you seriously suggesting that "professional" investors consider the consequences of their actions?! Aside from the profit calculation of course.

  • Comment number 48.

    Re: my comment number 36 this is not an advert but evidence to support my comments. Refer to the Daily Mail of today, June 11, and go to page 33. The article in question 'How's this for a £75 council flat?'
    Does nobody else find it interesting that some of our comments suddenly become a news item. It's a strange world isn't it. No wonder the blogs are moderated, can this be nothing other than journalism on the cheap.

  • Comment number 49.

    It's time for the world to realise that the present economic model is at an end.

    It may have worked when information flowed at a much more leisurely rate and the majority of institutions and investors had a balanced attitude towards personal gain and global responsibility.

    Sadly it is now all about personal gain; with investment companies using their wealth to manipulate the markets and wring every penny out of the pension funds and any other pocket of money they can find.

    This is all about pure greed folks, failed executives giving themselves massive bonuses and the filthy rich refusing to pay taxes. Sadly, as history shows, global conflict may be next.

  • Comment number 50.

    I'm currently working for a European paper maker who are investing £400 million in a new newsprint mill in the UK to supply UK newspaper publishers. Yes, that's right, a £400 million investment to supply paper to an industry that is now in decline (falling sales and paginations as media and advertising migrates to the internet). The trick here is to supply local markets on a local level. We cannot rely on imports and these will not be our source of 'cheap goods' especially with the current exchange rate and rising cost of freight. UK industry can survive and grow but it needs to ensure that in doing so it invests in the best equipment and the best people to ensure best efficiency. Tough times ahead - Yes, but lets face the tough times by becoming more efficient in what we do.

  • Comment number 51.

    Grumpy Bob @46.

    Working in the brewing industry IO can assure you that is the reason. The major players, that own the big brands, plan 2-3 years in advance for what they see as peak consumption periods and buy futures on the supplies they need. If anything goes wrong, such as England not qualifying for Euro 2008, they are stuck with stuff they've made that is in storage and futures they've bought in wheat etc that are about to be delivered.

    As for shelf life, I suggest you look at the necks of the bottles, you will be surprised how long nitro-keg beer, cans and premium bottles lasts. It's only cask (real ale) where there is a short life.

    Also, all the foreign labels you see from USA, Spain, France, Mexico, Australia, Brasil etc etc is nearly all made here in the UK under licence. Of the stuff that is actually imported, most of that comes in in tankers and is bottled here.

  • Comment number 52.

    It is unfortunate that most of the postings here are preaching to the converted.
    I fully agree with much of the sentiment, but what to do...?
    We are clearly heading towards some economic "disaster" but much of it is self inflicted and those of us who tried to keep a reign on things will end up paying for the rest who didn't.
    As for politicians they are by definition professional liars, thiefs, cheats and charlatons and will only save themselves. Time and time again we see this. Bankers are the same.
    There was a reporter on BBC News 24 the other night (who's name I didn't catch, sorry if you're reading this), that said the level of fuel duty we are paying is approaching the level of tax that was place on Salt in France during the 18th century precipitating the French revolution.
    The simple truth is we live such nanny state molicoddled lives the majority will shake their heads and say "Don't be ridiculous, things like that won't happen here, not nowadays..."
    Maybe not a revolution but changes we can't even imagine will be coming. Financial and otherwise.

    Keep at 'em Robert!

  • Comment number 53.

    High interest rates may curb spending on luxury items, but not essentials such as food and fuel.

    Current inflation is due to the rise in food and fuel prices, not luxury items. This increase is due to low supply rather than increased demand. High interest rates won't diminish demand of food.

    - Will high interest rates simply precipitate recession and fail to slow inflation?

  • Comment number 54.

    It's kind of sad, and ironic, that the end of personal Share ownership and pension contributing, will be brought about not by communists or socialists, but by Shortselling hedge funds robbing British Shareholders of equity value.

    They are at it again with building companies now, more Pension Funds being swindled !

  • Comment number 55.

    Interestingly the people buying luxuries often do not have Mortgages.

    So anyone belonging to the non mortgage Class, will not have their Demand managed by a rise in interest rates.

    Interest Rates will only affect the poorer people who don't buy that much anyway!

    However, interest rates will not affect International commodity prices unless every country is doing similar things with a similar economy.

    Most economies have quite different dynamics and will therefore have different demand for commodities.

    Therefore raising Interest Rates in Britain and europe will not affect demand elsewhere, or not greatly.

    So comodity prices will remain high.

    Unless it is a Gamblers Bubble caused by idiots doing their Spread betting and CFD.

  • Comment number 56.

    It is interesting to note that the UK stock market has been supported (liquidity wise) by Share buybacks for years.

    Now these Share buybacks have ceased, with fewer and fewer people taking out Pension plans, all Shares are going to be falling.

    Perhaps expect the FTSE 100 to be at 5100 again by the end of the year, or to be really negative it could be as low as 4800.

    After all, who is going to trust their Pension or Savings to Shares, that a Non Shareholder can sell down to nothing by Shortselling ?

    Not many people are going to have any confidence in the Stockmarket after all this.

  • Comment number 57.

    Whose company will be targetted next ?

  • Comment number 58.

    We are in a period of transition and these are always painful. Feedback effects in the global economy always prevent long-term trends from having gradual effects, and tend to make the inevitable changes get underestimated at first, then over-estimated.
    What are the changes?
    In no particular order, they include:-
    1. Fossil fuels. The annual supply of this is not fixed but the result of price-driven oil exploration. Higher prices mean more exploraiton and an increase in the medium-term supply.
    2. Gas. The UK dash for gas was driven by short-term economic gains and is looking increasingly foolish on several fronts.
    3.Alternative fuels. Many of these (including hydrogen and electric-based) have been waiting for the era of low-price petrol to end to make them econimically viable. Oil price rises are a requirement for change, not a disaster. Provided, that is, that political pressures to keep the prices low don't delay the necessary investment in alternatives until too late.
    4. Housing supply/demand. In the Uk at least there is a chronic under-supply of desirable homes (and the land with planning permission for them) which is not going to go away. So long as planning laws are not relaxed suddenly this pressure will be maintained.
    5. Property Prices The additional factor hs been the conclusoion by much of the UK population that after the fiascos in share prices (dotcom crash, unti trusts, etc etc) and pensions, the only realistric place to place investment money was housing. I still don't see an alternative to this. The major downside risk is a new government freeing up permissions so fast that house prices drop like a stone and make everybody feel poor again.
    6. Debt financing. The long experiment by government central banks in devolving the creation of momeny (via debt) to commercial organisations has been not just an economic disaster but a social one too, as it has skewed the wealth back to the few and away from the many. The best solution to this particular problem is for governments to take it back in house. Yes, they will then print money to get themselves out of trouble, and yes this will raise inflation. But
    double-digit inflation (which taxes wealth and refunds debt) is the best cure for the social ills too. The bankers won't like it, but this is hardly a surprise. We should be making them do our bidding not letting them tell us what to do.
    7. World growth. This can and will continue for a long time, despite the pressure on natural resources. As always, it needs the price mechanism to drive efficient use of resources. And until some bright spark can come up with a satisfactory financial system that does not rely on continual growth, we will inevitably get more booms and busts.
    8. The UK economy. This has been skewed for years by the pre-eminance of the City of London. The UK has a clear choice between investing in engineering (in its widest sense) and in money creation. If we continue to to do the latter we will be subject to more of these economic upheavals and risk losing the somewhat-illusory gains in wealth we have seen in the last decade. If we do the former, we stand a chance of remaining an economic force. personally I'd prefer to see the city of london under the Thames permanently and the banking disappear to the US. The we might get some interest and investment in industry. But I don't expect that to happen.
    9. Agriculture. The low world cost of food has had several effects on the Uk and world economies and these will reverse as population growth and living standards improve in the 3rld world. Land recently taken out of food production will be reclaimed and UK farming will become profitable again. Rising prices are the necessary catalyst in this. But with rising food and energy prices in the UK this will casue massive deflation unless the exchange rate drops. WHich again means an end to the city-of-london-driven economic policies we suffer today.




  • Comment number 59.

    We are in a period of transition and these are always painful. Feedback effects in the global economy always prevent long-term trends from having gradual effects, and tend to make the inevitable changes get underestimated at first, then over-estimated.
    What are the changes?
    In no particular order, they include:-
    1. Fossil fuels. The annual supply of this is not fixed but the result of price-driven oil exploration. Higher prices mean more exploraiton and an increase in the medium-term supply.
    2. Gas. The UK dash for gas was driven by short-term economic gains and is looking increasingly foolish on several fronts.
    3.Alternative fuels. Many of these (including hydrogen and electric-based) have been waiting for the era of low-price petrol to end to make them econimically viable. Oil price rises are a requirement for change, not a disaster. Provided, that is, that political pressures to keep the prices low don't delay the necessary investment in alternatives until too late.
    4. Housing supply/demand. In the Uk at least there is a chronic under-supply of desirable homes (and the land with planning permission for them) which is not going to go away. So long as planning laws are not relaxed suddenly this pressure will be maintained.
    5. Property Prices The additional factor hs been the conclusoion by much of the UK population that after the fiascos in share prices (dotcom crash, unti trusts, etc etc) and pensions, the only realistric place to place investment money was housing. I still don't see an alternative to this. The major downside risk is a new government freeing up permissions so fast that house prices drop like a stone and make everybody feel poor again.
    6. Debt financing. The long experiment by government central banks in devolving the creation of momeny (via debt) to commercial organisations has been not just an economic disaster but a social one too, as it has skewed the wealth back to the few and away from the many. The best solution to this particular problem is for governments to take it back in house. Yes, they will then print money to get themselves out of trouble, and yes this will raise inflation. But
    double-digit inflation (which taxes wealth and refunds debt) is the best cure for the social ills too. The bankers won't like it, but this is hardly a surprise. We should be making them do our bidding not letting them tell us what to do.
    7. World growth. This can and will continue for a long time, despite the pressure on natural resources. As always, it needs the price mechanism to drive efficient use of resources. And until some bright spark can come up with a satisfactory financial system that does not rely on continual growth, we will inevitably get more booms and busts.
    8. The UK economy. This has been skewed for years by the pre-eminance of the City of London. The UK has a clear choice between investing in engineering (in its widest sense) and in money creation. If we continue to to do the latter we will be subject to more of these economic upheavals and risk losing the somewhat-illusory gains in wealth we have seen in the last decade. If we do the former, we stand a chance of remaining an economic force. personally I'd prefer to see the city of london under the Thames permanently and the banking disappear to the US. The we might get some interest and investment in industry. But I don't expect that to happen.
    9. Agriculture. The low world cost of food has had several effects on the Uk and world economies and these will reverse as population growth and living standards improve in the 3rld world. Land recently taken out of food production will be reclaimed and UK farming will become profitable again. Rising prices are the necessary catalyst in this. But with rising food and energy prices in the UK this will casue massive deflation unless the exchange rate drops. WHich again means an end to the city-of-london-driven economic policies we suffer today.

  • Comment number 60.

    #58 Cassandretta

    You mention hydrogen as an alternative fuel.

    Where do you think hydrogen comes from?
    Currently most hydrogen is made by reforming natural gas, methane. A very small amount is made by electrolysis of water.

    The point being that hydrogen uses scarce and expensive resources to make it.
    As those resources get more expensive so does the hydrogen.

    If it was uneconomic to use it when energy was cheap then it will still be uneconomical when the very energy it uses in its manufacture is expensive.

    Light weight electric trains and trolley busses are the answer.

  • Comment number 61.

    Whose company will be targetted by the Hedge Funds next ?

    Just curious, they seem to be in Control of the market right now.

  • Comment number 62.

    tomorrow ...12.06.08 ...should be a blood bath on the exchanges ... will Bernie-mac let it happen tho?

    It needs to happen simply toprice in the events of the last year.

    Stocks tomorrow... oil within the month ...off20% ... gold up 20%.

    Clue ...if it's to to do with property or banks ...especially banks ...sell sell sell!

    Clue #2 ... CREDIT DEFAULT SWAPS ...$68trilion, all about to be called on... all about to be found worthless... sub prime mkIII (armageddon...revelations chapters 1 thru 13... end of the world as we know it ....etc)

  • Comment number 63.

    At 00:59 am on 10 Jun 2008, U9461192 wrote:

    I entirely agree. Indeed I have copied your comments so that as your predictions reveal themselves I will be able to say At 00:59 am on 10 Jun 2008, U9461192 predicted this

    Many thanks

  • Comment number 64.

    Cassandretta, the housing supply shortfall is a myth. If there is a shortage of housing why do all the housebuilders have thousands of empty homes they can't shift? Why are there not thousands living on the streets?

    This myth has been perpetrated by housebuilders in order to get the government to rezone new land so they can build more exectutive homes (with the occasional sop of a tin shed dressed up as "affordable" housing).

    Only in London and it's commuter belt is there any real hard limit.

    There is, however, a shortage of affordable housing (and I mean that in the literal sense of the word). This is largely due to BTL, second homers and general property speculation, factors that the market will soon fix itself (as long as Gordon doesn't interfere).

    The most outrageous thing about this is not that the developers played on a perceived problem to make more money, but that the government bought it hook, line and sinker. The real question is was it incompetence or something worse?

  • Comment number 65.

    #9:

    Oil - $150

    Whilst demand is currently being skewed by speculation, I think there is actual demand from Far East to support a higher level for Oil, which is why the traders are speculating.

    Gold - $950

    As inflation rises, more people will be ploughing into Gold. However, I think the Fed may have to start selling stocks to support the US, hence keeping the price from going too high.

    £:$ - ?
    £:€ - ?

    These will largely reflect interest rate fluctuations. I have no idea how the political brief of BOE will change in the near future, nor what the Fed or ECB will do to combat their own problems. This is the big unknown for me. It may be that Government decides to give the BOE a free hand, and avoid the conundrum of pushing up rates to stop inflation, where the inflationary factors are largely external.

    Dow - 14000
    FTSE - 5500

    Whilst the US will opt to prop up the market to avoid other issues (such as large amounts of personal share ownership in the States (see the price of Gold above), I think the UK has run out of resources to do this (and yes, this does imply that I think Government may have had something to do with the run over the last few months), and will be unable to support the FTSE. This will inevitably cause an eventual BIG fall in the FTSE as pensions seek to exit. However, I think that is next year's shock.

    And as Government runs out of money, expect unemployment to rise. In the 1970s, we had British Leyland to keep people employed, now all we have is the civil service.

  • Comment number 66.

    We, as a country, have sold ourselves into slavery in return for a few shiny and shortlived trinkets.

    On a different note, I fail to see how higher interest rates could possibly counter inflation in this case. Clearly debt means interest which means more money has to be made to pay that interest. Since every man and his dog (Santos Il Halper) is in debt, thats an awful lot of money needs printing. Since there's only a finite amount of stuff to base the value of that money on, the value of the money itself drops. The bank raises interest rates to compensate, more money needs to be printed, and the whole downward spiral makes another turn.

    If the inflation was based on rising internal demand for goods (which was once upon a time based on debt) then rising interest rates would encourage more people to save rather than spend, demand would reduce, wage demand would reduce and therefore inflation would slow.

    Unfortunately there is no money to save, it's all being spent on debt. So we send that downward spiral even faster, because we have the one half of the equation - reduced internal demand, but all the money is being spent paying back debt - and we need more and more of it.

    There are two solutions. One, more debt, leads to short term economy boost and long term bankruptcy. The second is to work towards total self-sufficiency, the abolition of personal and governmental debt and a cap on secured debt. This would be extremely painful in the short term (and expensive - I hope there's something left to borrow) but in the long term it would fix almost all of our problems, financially speaking.

    For now, we need to pay back all that debt. Quickly.

  • Comment number 67.

    Hmm, no one has suggested which company might be short sold next by the all mighty Hedge Funds.

    Don't they want to buy up UK PLC on the cheap?

  • Comment number 68.

    I often see this notion that imported inflation doesn't matter because the causes are external. Surely you are not only concerned about the causes of inflation but the effects? It is true that - as the inflation is not caused by domestic overheating - a less than fully employed workforce has less bargaining power to set off the wage-price spiral. However, many parts of the workforce have wage tariffs negotiated on the basis of the RPI. And fuel and food are a part of this inflation measure, as are rents. A lower pound will generally increase the price of anything imported from outside the US. And personal budgets will be strained with higher mortgage payments.

    Unfortunately the only way to peg inflation at a low level is to make sure that the domestic economy slows down enough to keep the overall measure at a low level, even if imported inflation is rampant. That way you stamp out any dangerous notion that imported inflation doesn't matter, and we can all eliminate the increase in fuel and food prices by simply paying each other more and more.

  • Comment number 69.

    The sales of valium must be going thro the roof. Come on cheer up the price of oil will be back under USD 100 within the next 8 weeks
    US spending has risen ( against all the doom mongers prediction) and what did the great british public do before the house boom started.
    Relax! go out for a pint, spend a little cash and above all stop contributing to the end of the world is nigh brigade.
    They have been around since the plague and we survived that

  • Comment number 70.

    i already figure it out when the media predicted it....

  • Comment number 71.

    Since my last posting (June 10th) things seem to have got worse, more quickly. I think it brings home just how fragile an economy founded on debt and house price inflation can be.

    On unemployment remember that the economy needs to grow at about 2% to MAINTAIN current employment levels as business generally increases its efficiency by that level per year. This is why Mr Darling cannot be seen to agree with the CBI (i think...) who think growth will slow to 1.3% thus triggering major downsizing and redundancies.

    One thing is true, we cannot spend our way out of this one, nobody will loan us the money to do it!!

 

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