Can Someone Explain.

[pimplyteen]

Me being a little dumb :0) I've never really understood how increasing the bank rate helps stop inflation.Make it simple if you can.

[ToraToraTora]

Inflation is caused by a surplus of money so prices rise because there is more demand for things and more customers. Raising interest rates is one way to reduce money available to spend, thus sellers of everything have to compete for customers and one way they do that is by dropping prices. Much more to it obviously but that's the basics.

[bobbinwales]

Encourage saving so people spend less so retailers put up prices less to encourage sales. People borrow less and don't spend what they would of borrowed.
More of your pay go's on mortgage so less money to spend on other things .
Probably more to it to do with bonds and gilts what I don't understand but thats a quick guide imo

[bobbinwales]

Ttts post I did't see till after I done mine.. we did'nt collude and I'm not ttt

[ToraToraTora]

Back in the day governments used the MONIAC, an ingenious analogue computer invented by the Kiwi, Bill Philips. This video shows the machine working and the effects, quite fascinating:

[jim360]

One point I'd like to add is that, as far as I understand it, you actually *want* at least some inflation. Since deflation, ie money increasing in value, encourages people to hold on to it, then that would lead to sales drying up altogether, which is damaging.

Also, I think the other aspect of the target is that you want inflation to be more or less constant, so that there's some predictability in the market.

But there's loads of this that is completely beyond me.

[douglas9401]

The MONIAC is a remarkable machine but has been superseded by the MANIAC, a machine that runs on hope, prayer and the friction created by the crossed fingers of the inadequate.

[ToraToraTora]

Yes jim, deflation is considered as bad if not worse. The hard bit is keeping inflation in a sensible range which is generally considered to be around 2%.

[ToraToraTora]

what about the MOANIAC doug?

[pimplyteen]

Ok I understand up to a point ( I think) I will just pick up on TTT first post. "Dropping prices" Most if not all businesses are struggling to hang on in there especially smaller traders, many are already in the red and only a matter of time before going bust.
The only option left open to them is to increase the price of product/ products that they sell in any hope of stopping in business and to hold on to a workable business. Is this not inflation growing?

[ToraToraTora]

Yes there are other factors, they can't drop their prices now but inflation is not controlled in the minute. Changes now take months/years to take effect. When the retailers costs also go down they can drop their prices to the customer but for inflation to stop we don't need price drops we just need slower rises. Think of it like a massive oil tanker, you have to start manoeuvres way way in advance.

[New Judge]

The problem is that this latest bout of inflation is not caused by the traditional problem - too much money chasing too few goods. This round has been caused principally by global events, in particular the enormous increase in the cost of energy. People have had their disposable income severely curtailed by that and don't really need it reduced any further.

[pimplyteen]

Tora, I've been hearing the same sort of projections, better jobs, better pay, more investment since I was a kid back in the 60/70s It don't matter what party is in we hear the same over and over. It plainly doesn't work. The way it's going there won't be any businesses left.

[ToraToraTora]

pimply: "Tora, I've been hearing the same sort of projections, better jobs, better pay, more investment since I was a kid back in the 60/70s " - well things are a million times better now. The last couple of years have been rough because of multiple world crises but overall we are quantum leaps ahead of the dark days of the 60s and 70.

[pimplyteen]

13.04 Can't disagree with that post really, plus the drain of Covid?

[pimplyteen]

I don't really recall those dark days but being a kid, you don't. But what I do remember is having a job and my parents drumming into me to always save for a rainy day don't spend everything you earn.
Even with the exceptional circumstances of today people still spend way beyond their means and expect others to bail them out when their money runs out.
If you ran out of money in the 60/70s tuff.
For a few years now the credit card has been given to people with no idea how to buget. I want I have no matter what, and I don't care how I get the money to do that.

[New Judge]

//For a few years now the credit card has been given to people with no idea how to buget.//

Unfortunately it has also been given to national governments. For about 25 years the perceived wisdom of "very clever" people was that prosperity could be achieved by keeping interest rates artificially low and printing vast quantities of increasingly worthless money. This inflated property prices to ridiculous levels, increased the price of many equities way beyond their true value and gave everybody access to easy money to buy goods and services that they really could not afford. Meanwhile real growth stagnated but was hidden by flooding the country with freshly printed banknotes.

The chickens are now coming home to roost and all nations must realise sooner or later that the economic model of the last quarter century was madness. Fortunately Ms Truss has realised this sooner than most because the longer the problem is left unaddressed the harder it will be to cure it.

[Hymie]

Many economists and others involved the financial industry claim that a negative inflation rate will cause economic issues in that people will not buy things if they realise that by delaying any purchase it will be cheaper to buy at a later date.

But this is nonsense – in around 1997 I purchased my first home PC for around £1,000 – this despite me knowing that if I delayed buying it, as time went by the PC would become cheaper and have better performance. Today I could probably by a PC that would far out strip my first £1,000 home PC for less than £200; and that 1997 thousand pounds would be worth close to £2,000 today.

Although you might say more fool Hymie – he knew if he waited 25 years to buy a PC, he would get a much better deal.

Imagine food to be ‘suffering’ prolonged deflation – do you think people will stop buying food for a year, knowing that they will be able to get it cheaper in a year’s time?

[ToraToraTora]

You've just picked a thing that gets cheaper hymie, tech. generally the fears of deflation are valid.

[Hymie]

That’s what happens with deflation – things get cheaper.

[ToraToraTora]

hymie: "Many economists and others involved the financial industry claim that a negative inflation rate will cause economic issues in that people will not buy things if they realise that by delaying any purchase it will be cheaper to buy at a later date.

But this is nonsense" - it's not nonsense, you've picked something that gets cheaper for non economic reasons.