Be Excellent To Each Other

I'd like those with a more financial bent than I to look over my reasoning here, and let me know if it makes sense.

The CPI (Consumer Price Index) is what the government publishes as the inflation rate.
The government insists that inflation must be kept low (to the point of Darling telling people not to take pay rises).
The traditionally favoured way of forcing down inflation is raising interest rates.
Mortgage payments are not included in the CPI.

So - raise interest rates, and the CPI falls because people have less money to spend on stuff.
However - the CPI is supposed to reflect cost of living, and for homeowners, the single largest influence on their cost of living is their mortgage repayments.
So actually, if you raise interest rates, you raise the cost of living for homeowners.

The conclusion I draw from this is that the CPI is in fact unrepresentative of the actual cost of living for an enormous part of the population, and that raising interest rates does in fact raise the cost of living, rather than lowering it as is the stated aim.

Am I wrong somewhere?

Sounds feasible.

The government won't be happy until we spend ALL of our money on mortgage payments we can't afford, thus keeping the housing market artificially inflated, whilst the MPs get whopping pay rises and eat live swans.

Not just homeowners either - renters are likely to get rate increases passed on to them in some way, via the owners bumping them up to cover the mortgage.

All true, I think.

Also, if you hammer the homeowners and renters with mortgage/rent increases via interest rate hikes and you do get inflation to reduce, you're reducing the profit margins of the populace's employers, who may be inclined not to increase their wages much, if at all. Therefore effectively increasing the cost of living further.

Genius, isn't it?

Ah, but (for some reason), rent is included in the CPI - so while it's just as stupid, it's not quite so deceiving.

Actually, thinking about it, the ultimate inflation solution is for the government to take all of our money off us so we can't buy anything.

Mind you, they're very close to doing that to me already, I have to say.

And don't forget they cherry pick the items in the "basket of goods" to get the results they want.

The interest rate set by the bank, though, isn't the only thing that determines the cost of mortgages - that's the swap rate, or whatever it is, which determines the rate at which they'll lend to each other. That way those with large deposits can use that as collateral to advance to other banks, and they do that based on their own circumstances, how much money they have on deposit and so on.

Errr, it's all connected and all fiendishly complicated. What bugs me most is the number of articles I've seen springing up to decry the little guys - especially where unions are involved - wanting more money to counter an increased cost of living as inflationary and therefore selfish and short-sighted. And yet those arguments aren't used when bankers and the like take their whopping bonuses home.

But 90% of mortgages tend to be either trackers (so are predicated on the interest rate), or fixed, in which case they are invariably fixed at somewhere around 1.5% above whatever the interest rate is at that point in time. The only real difference the swap rate causes is to vary whether the trackers track at 0.5% over the base rate, 1% over the base rate, or whatever.

A Labour Government is the one that made this country the best tax haven for the ultra rich. I suspect Keir Hardie is rotating in his grave.

True. A lot of banks are lending at ridiculous interest rates as they can't get the cash in. Barclays was at somethign like 8%, or something similarly daft.

This is where I get very happy that I'm with HSBC, who self-fund 100% of their mortgages. We have benefited from every interest rate cut. Huzzah!



Also true - and this is something that pisses me off about the public sector pay deal nonsense too. As if a few thousand public sector workers getting a few hundred quid a year less would turn the inflation around. FFS

However, those Shell drivers (who are actually employed by the companies to which Shell has outsourced its transport, rather than by Shell itself) can fuck off with wanting 38k to sit on their fat arses driving badly for a few hours a day whilst simultaneously reading porn mags - except, of course, that their employers caved. FFS - I shall be encouraging First Born and Second Born to become truck drivers, then.

The Shell I pass before joining the M62 still hasn't restocked V-Power (or unleaded). The one near work is closed for a refurb. Thank fuck the one near my flat (and only half a mile emitted carbon!) had plenty of V-Power this morning - I don't want a repeat of Thursday, when I had to crawl along the 62 to Birchwood and put 3 gallons in at 129.9p/l.

I think, further to my previous ramblings, that the idea is that inflation is fuelled by spending, so

- putting up interest rates covers two bases, creating an incentive to save...
- plus a disincentive to spend, in that borrowing (this meaning loans for smaller items) becomes more expensive

All sorts of other things are in the mix. I suppose the idea is that people have to pay for their living costs, so if that consumes more of their budget then that's just something you (the powers that be) live with, but putting interest rates up cuts spending on luxuries. The recent good retail figures gave the lie to that but is likely to be a bit of a blip - it always takes a long while for the press to start talking about recession and the like, and even longer for people to modify their behaviour. And those with big wonga, of course, aren't affected at all.

I get the idea that raising interest rates encourages you to spend less and save more - but it's based on a fallacy, because only mortgages are index linked. When was the last time a credit card offered to track at no more than 15% above the base rate?

Raising interest rates really does have sod all effect on people's savings or debts, except for mortgages. And then to claim that you've 'controlled the cost of living' by publishing a CPI that doesn't take into account the single largest outlay, itself increased by interest rate rises, is patently ludicrous.

Can't we just shoot some brown people? That usually fixes stuff, I thought.

Hello.

The thing about interest rates is that while they are an extremely blunt instrument, they are pretty much the only tool available to control inflation. You can also increase taxes, and decrease public spending, but that's even less popular. In this very thread we've seen argument for sending both of these things the other way.

Craster, you also seem to be confusing 'the cost of living' with 'the price of things in pounds and pence' although the distinction is made deliberately ambiguous whenever they raise interest rates. They WANT to raise the effective cost of living in the short term, so everybody buys less, so that the demand mechanism can do its work and prices fall compared to what they would have been. Fundamentally, controlling inflation is about controlling how many pounds everybody has, to ensure those pounds are worth something ten years down the line.

Also interest rates on things like credit cards and savings accounts ARE influenced by the base rate, but the mechanism is a subtle one and with a long lag time (depending on the product - the best ISA rates track the base rate fairly closely). Like I say, it's I crude instrument, but it's all there is, unless you want to go back to the gold standard.

As for the CPI, I'd argue it makes sense to exclude mortgage payments, for the same reason you think they should be included - they are the product the bank changes the price of to influence the price of all the other products. If they include the thing they are changing directly then the sensitivity of the test to the thing they are actually trying to alter indirectly is reduced. You can always track the RPI, which does include mortgage rates, if you prefer.

Personnally I'd like to see different inflation rates published for people at different income brackets, and make controlling the low income one the taget rate. If you're poor and spend all your money on food, inflation is sky high. If you're rich and spend most of your money on consumer electronics, it's much lower.

What makes things inflate in the first place?

Immigration.

Minstrelist!

Instead I propose we just burn Fiona Phillips at the stake. It won't make any difference but it would make me feel happier.

Welcome Lardy!

Or helium

*WOOP WOOP QI ALARM*

Oh, I understand the mechanism, what I don't understand is the publicity. What's advertised always seems to be the CPI - and they trumpet the fact that raising interest rates has caused a lowering in the CPI. What they never say is that raising interest rates has raised the RPI, and made everyone poorer, and as a result has lowered the CPI because no-one has any money to spend. I guess it's harder to spin that.

Interesting post, thanks.

Hello! Welcome!



Very true - and this a point continually made by the more intelligent economic commentators. It was starkly apparent when the US Federal Reserve dropped their interest rates to -1000% or whatever it was last year.



The two things are largely interchangeable though. Granted, if you don't buy anything and grow your own food, your personal inflation level and cost of living is next to zero. But I'd understood that the CPI/RPI metrics were to measure the price of various goods and services which the average person will need to spend money on in order to provide some measure of the "cost of living". Otherwise what would be the point in measuring the changes in the prices of things? They may as well just pick incredibly esoteric items like leather bullwhips if it's not to do with the "cost of living" and if they're just picking stuff at random.



This would require buying all our gold back of course, after our Supreme Leader made the excellent decision of flogging it all off at the bottom of the gold market.



Hmm, very good point. Still, as the "cost of living" is, arguably, what the whole inflation thing is about, and mortgages are a big component, there's an argument for them being in there. It all depends on what you want this "inflation" metric to tell you. I'm not 100% sure what the government thinks it's for, mind.

However, a thought has occurred. How many people in the UK actually have mortgages? I would imagine that the effect on inflation of interest rate rises would be proportionate to this, and would change with the number of houseowners. If we all suddenly started renting, the Bank would have no lever to effect inflation. Score!

Mind you, as inflation is largely driven by energy prices and food shortages at the moment I'm not sure how the Bank can do anything about it anyway.


I like this idea but I should imagine that this would be nigh on impossible.

I'd mention that my eldest sister who, like her long term partner, has never worked, owns lots of very expensive electronic kit. Goodness knows how they afford it, but they do. They seem inflation-proof. So even were it technically possible to calculate and publish inflation rates for different social groupings, I'm not sure one can categorise the populace sufficiently easily or meaningfully enough in order to do do this.