UK sliding towards first bout of negative inflation in 55 years

[PatrickC]

Well, this is depressing. The Bank of England openly admitting it wants to curb zero inflation. Up is down and black is white again.

 

http://www.theguardian.com/business/2015/feb/12/bank-of-england-warning-over-impending-interest-rate-rise

 

"Britain is sliding towards its first bout of negative inflation in more than half a century, the Bank of England has said, but strong economic growth should stave off the threat of a deflationary spiral.

The slump in oil prices and falling food prices is likely to push inflation to zero in the second and third quarters of 2015, probably dipping into negative territory for one or two months this spring, the Bank said in its February inflation report."

[Anuojat]

Peoples Value of Goods = Price of goods.

 

Artificially inflated price of goods = NOT peoples value of goods.

[LovePrevails]

what is the belief behind the idea that negative inflation is somehow bad?

[PatrickC]

what is the belief behind the idea that negative inflation is somehow bad?

 

Well the theory is, that if we have inflation, then we will spend our money more quickly, thus keeping the economy constantly refueled. Savings are a distaster for the BoE and banks in general of course, as we borrow less. They're also a disaster for the state that relies on the inflation to keep its debt levels and repayments at bay. The latter being something they wont tell you of course.

 

The BBC can explain the propaganda better than I.

 

http://m.bbc.co.uk/news/business-30795424

 

Going back to the original article, this was the specific warning the BoE gave the Chancellor recently, which extrapolates my earlier point about the state needing inflation.

 

"Carney warned in his letter to Osborne that if low inflation persists for longer than expected and the global economy is weaker, the Bank stands ready to cut interest rates further and pump more money into the economy through quantitative easing."

[Jer]

what is the belief behind the idea that negative inflation is somehow bad?

If you have a ton of debt you want to pay it back with money that's worth less than it was when you took out the debt (imagine paying somebody $20/year or 1 ounce of gold per year from 1900 to 2015). Also governments want people to spend so they can tax the commerce and bad economists think people won't spend money that is increasing in value.

[LovePrevails]

so negative inflation is bad because the government is in debt and because it discourages spending by incentivizing saving?

[PatrickC]

so negative inflation is bad because the government is in debt and because it discourages spending by incentivizing saving?

 

My previous response was modded and still yet to appear.

 

Yes, broadly speaking that is correct. However, they tend to paint it mostly as a net loss to the citizens, as in the supposed economic downturn that might occur can mean job losses or mortgage interest increases.

[LovePrevails]

My previous response was modded and still yet to appear.

 

Yes, broadly speaking that is correct. However, they tend to paint it mostly as a net loss to the citizens, as in the supposed economic downturn that might occur can mean job losses or mortgage interest increases.

 

I am sorry I may be a bit dim but I am having trouble grasping this.

On what grounds is it supposed to create and economic downturn and lead to job losses, or increased mortgage interest?

[PatrickC]

Well going back to the original Telegraph article:

 

“This reinforces our conviction that interest rate rises, while likely to be very gradual, will probably increase at a faster pace than the market expects. We expect the first hike to come in early 2016 and for rates to reach 1% by end-2016 and 1.5% by end-2017.”

 

My modded post will provide some further links which discuss the BoE's general opinion about low inflation/deflation in more detail.

[mlsv2f]

Their argument is that since money is increasing value by 1% every year in a deflationary economy, people won't spend money.

 

This is pretty much bullshit in that

 

A) People have the ability to save money and earn 1-12% in T-bills, money market checking accounts, savings accounts, equity and bonds and they dont't save anything

 

B) Electronics and cars decline in value (you can get a waaaay better version of something if you wait another year)

 

C) Peoples lives are finite, thus they are not going to save money to the point of reclusiveness on account of a 1-2% increase in money value

 

D) Saving money and better long term for the individual and society as a whole

 

 

My understanding of the argument against deflation is typically weak but most people are stupid and when they read in their econ 101 text book, the front page of the NYT, their favorite politician or news channel say so, they just assume its correct.