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Spot on Evan!

I fear that the coming crash is going to be very severe indeed.

It's a tricky balancing act for the MPC. Raise rates too high and domestic demand declines leading to slump. Don't raise them enough and we get inflation.

Still, we can be glad they're only juggling one economy, albeit one with a bit of north-south variation. The equivalent committee at the ECB have an almost impossible task of containing inflation in France without causing problems for the German economy.

Perhaps a subject for Evans next blog..

Keith.

Gas and Electricity prices have been named as one of the key causes of the current rise in inflation.

There have been reductions in these of around 20% recently. Could this help to neutralise the rise and help soften the potential crash?

The rising debt mountain should surely be seen as a significant part of the formula as well. Let's face it 5.5% is still pretty low given the actual inflation (not the BoE's target).

I suspect that a full blown row will shortly ensue between Brown and the BoE, as political and economic objectives diverge.

That is patently brewing nicely right now.

A lot of ordinary people suffered in the 1990's under Tories mismanagement of the economy.

Labour will not want to see voters going down the tubes because the BoE increases interest rates, because they know that just like the Tories, NL will get the blame.

PS. No wonder HMG are having second thoughts about the FoI Act, it is the only way we English people have of ever finding out in a reasonable timeframe, what is being done in our name.

Over priced housing allowing people to use there property as cash machines is a major concern. The boom no bust, borrow and spend economy is were we are now. The BOE should have raised interest rates far sooner. This spend today, pay whenever culture will cause misery for many. Restricting credit to sensible levels is the solution.

I remember the current government, when in opposition, claiming that combating inflation purely with interest rate rises is like golfing with one club.

I believe that claim was made repeatedly during the Lawson boom and bust.

So when in government, what did they do? Rely solely on interest rates.

Yet the current boom in the housing market especially is clearly due to the too easy availability of credit at ever-higher multiples. What has/did the government do to combat this?

Nothing, as far as I can tell. It doesn't require a return to tight credit controls, merely regulations that state (for example) that if a bank re-possesses a house, then the debt is written off - the bank can't chase anyone for the balance and they're not left with a mark on their credit records, either.

What about increasing the minimum percentage on credit cards that people have to pay off every month? One of the early things that Brown did when became Chancellor was to reduce that percentage, enabling people to run up bigger debts on credit cards more quickly.

Or in other words, this government is entirely to blame with its thoughtless, careless monetary policy and, while they all have cushy gold-plated mega-pensions funded by taxpayers, us taxpayers will have to foot the bill twice over: first with sky-high house prices, then with the inevitable collapse.

Our leaders, meanwhile, will be insouciently sipping champagne and wolfing down the caviar while the rest of us suffer.

Thanks for nothing Gordon.

Are we entering more dangerous economic waters? Or are we, after a long period of sustained growth, suffering an almost Germanic angst driven by a belief that the good times have gone on so long they just can't continue?

Remember, when Macmillan made his 'you've never had it so good' speech he was actually wondering whether it could continue.

Dead right about the myth of a shortage of supply. If there was such a shortage then rents would be going more or less in line with house prices so that landlords can maintain their yields, which they clearly aren't. Clear evidence of a bubble.

Controlling a measure of inflation (CPI) that doesn't address asset inflation, particularly housing, will prove to be a big mistake.

This looks like a re-run of the late 1980s in some respects ,but with far more worrying levels of debt that are starting to stifle the economy in certain sectors,for instance retail,already.

I live in the North West ,and enjoy the numbers game of watching the house prices rise,seemingly without end.

Take for example Alderley Edge in Cheshire where there are 20 properties on the market over a million pounds.

Two of these are apparently under offer.

In the past 12 months only 5 of these super-properties appear to have actually sold.

This presents a rather unsustainable market in this part of the world. The asking prices of these properties is clearly more than the market will bear.

My point is when the buy-to-let and the investment and development speculators start to realise that they are not going to achieve their expected yields what will happen?

A mass exodus from the market will of course trigger an oversupply,which will tumble prices.

If we get a soft-landing,we will be very lucky.

I think Evan is right I think but there are some untouched items worth discussing regarding inflation and interest rates.

The MPC has no directive to support the property market nor sustain domestic demand. Remember, interest rates were allegedly de-politicized when the BOE was granted indepdendence and it's only directive is to keep inflation within a narrow band (2% I believe). It's already 1% above that and rising, so until that changes I see rising interest rates.

There are however, other interest rate spectres on the horizon.

With the UK current account deficit near record levels and general debt levels at record highs you have a real threat of a weak pound, causing imported inflation. As we are a net importer this could really threaten CPI figures.

Money supply growth is in double digit growth territory. Most neo-classical economists know this will cause similar inflation levels in the medium term, and possibly explains the price bubbles we have seen in most asset classes (shares, bonds, property etc.) only a rise in interest rates and fall in money supply growth will address this.

But the major problem I see for interest rates is this. If you believe that energy and commodities are in a long term supercycle (due to demand/supply imbalances as it currently is) then rising price inputs will lock inflation in the system in the form of rising energy bills, and prices of clothes, cars, consumer electronics and other major components of CPI.

If you accept the above, then I feel we have a re-run of the 1970s. Is it inconceivable that inflation can head towards the 7-10% and interest rates in a similar direction perhaps?

My class is revising for AS Economics. A question we covered was the effectiveness of interest rates to combat inflation. my students pointed out (quite correctly) that cost push inflation may not respond to interest rate rises. If China's demand for raw materials for example is pushing up costs, this may be reflected in higher prices (depending on price elasticity of demand). You say that we have a mini-boom at the moment. Does this that most of the inflation is demand pull? Does the BoE satisfy itself of the nature of inflation before raising rates? We continued this theme (cost push inflation sending the AS curve to the left, stagflation etc). A good talking point - your blog is recommended reading.

Every twenty-something in the south east is desperate to get onto the bottom of the housing ladder, with minimal success. So demand is not going to fall away just like that.

These rate rises are a chore for my mortgage, but much better to be squeezed a bit at a time like this than let politically motivated rate decisions lead to an out-of-control crash.

As usual there is no mention of the ludicrous measure of inflation that the MPC is forced (politically) to use and again no mention of the political appointments of dovish members of the MPC both designed deliberately to keep interest rates at an artificially low level to sustain a totally false boom based on ridiculous levels of DEBT (only sustainable whilst interest rates are kept artificially low). Public sector inflation is rampant and real interest rates in this country should be at least 6.5% not 5.5% but oh dear what would that do to Gay Gordon's so-called economic miracle?

I guess one day you people will WAKE UP and report real economics and not this primary school rubbish.

The problem is that the recent interest rate rises haven't had a chance to take effect. If you are currently paying 7.5 % on a buy to let mortgage and haemorrhaging money because your rent doesnt cover your mortgage anymore, you can't remortgage because you only have 15% equity in my property and the banks want much more these days. Without doubt another interest rate rise is going to bring the buy to let market crashing down, if not now in the next 6 months when people move out of their fixed rates. "Good" say all you labour voting ±«Óãtv readers out there but these are some people's only investment.

I personally blaim Gordon Brown for all of this, he could have done much more to take the heat out of the housing market over the last 12 months and hasn't done it. He should remember that interest rates aren't the only way to manage the economy. Maybe a bit of good old fashioned socialist progressive taxation is in order or is that too old labour?

I hope that the MPC are alert to the fact that, no matter what the increase in interest rates, it will have no effect on the boom in property and the financial service sector in London. London is the most desirable place to live and do business in the world, and the people flocking here don't need mortgages to buy their property. The MPC should concentrate on the rest of the UK and keep rates where they are.

We live in times when corrupt officials rule the government - maybe it has always been that way. The economy we have in England and throughout the world is more or less a scam. Banks get the ability to create money out of thin air. Inflation is actually the process of currency devaluation as central banks continue to flood the economy with money made out of thin air - money that does not represent any increase in actual productivity. Right now the global economic farce is being run by the United States, whose own economy is in serious trouble. But that means nothing to elite bankers, investors and corporate business men who stand to profit while the average Joe while lose his shirt.

Evan

I have just taken a job in the US. I will be paid in dollars. I feel rich in the states but, due to the exchange rate, poor in the uk. I have a number of bills to pay in the uk. The exchange rate seems extreme currently, should i expect it to fall back into line, making my dollars more valuable?

By raising interesrt rates there is a massive risk of us (recent first time buyers!) ending up homeless. We were told to buy a house quickly while you can still afford one, now after stretching to our wage limits to get a mortgage we find ourselves with interest rates going up. I better go and buy a couple of cardboard boxes for me and the missus! This country gets better all the time

One issue which is neglected time and time again re interest rates and inflation is that many pensioners rely on bank accounts for a key element of their income, not least because they are advised as they grow older to hold assets in a less risky form.

So higher interest rates are not all bad since pensioners will spend a high proportion of any extra income on luxuries like food, fuel and council tax.

Well, have look at the money supply growth figures.

A year ago they increase by 3-4% to 14% and oooh look, what do you know, a year later the interest rates are increasing to suppress inflationary pressures.

Shock... Horror... Surprise...

I agree with Alan and most of the comments. Higher interest rates are almost inevitable. Those who are over streached, under-captitalized businesses and overstreached individuals alike.

There is one outcome of relatively higher intersts. Alan has previously stressed how the sinking U.S. currency has made the import price of goods and materials priced in dollars steadily decline. However the flip side of this is that it becomes increasingly difficult to add value to to these materials and re-export them to the Euro zone in particular. For example, the British can build as good cars as anybody but here in Spain we see lots of cars from France, Germany, Italy as well a 1 millon of the 3 million cars built in Spain each year but with the exception of the New Mini, hardly any from Britain. Britain could be about to pay a very heavy price for failing to join the Euro Zone which is now the largest market in the world, larger even than the the U.S.A.

Surely the main 'thing' affecting the bank's decision should be the divergence from their calculation of the NAIRU? Stay hawkish!

Evan is right all respects save one. He states that "Of course, it might be that houses are not over-priced and reflect genuine supply shortage (though it becomes harder and harder to believe that). " If one factors in population expansion caused by increasing life expectancy and by net immigration, compounded by the demand for each generation to live in its own home, further compounded by many of the young and middle generations wishing to live in solitary domiciles, it is easy to see that demand far exceeds supply. Significant liberalisation of planning laws is needed to meet this entirely rational demand and thereby ease the inflationary pressures. Failure to open this safety valve will have adverse social consequences, particularly in widening the divide between property owners and those trapped in rented properties.

D Rogers is correct to point to gas and electricity prices as one of the key inflationary pressures, but the sustained high price of oil also seems significant. The crude price rises of the past 2 or 3 years is contributing to inflation now as oil-based raw materials & transport costs work their way through the commodity supply chain to finished goods in the RPI/CPI baskets.

If crude prices stay high - or rise further in future due to the anticipated peak in world oil production - things could get interesting: as price rises increasingly reflect the rising cost of production (not just increased demand caused by economic growth), monetary policy becomes an ever more blunt tool.

Furthermore, the £1.4 trillion in consumer debt (and who knows how much corporate debt that private equity firms have doled out) should make the MPC rather cautious about raising rates too far as it could trigger a flood of defaults, hurting the lending banks.

So, I fear we may have only seen the beginning.

I agree with joe (#6) regarding the concern of people using equity in homes to fund purchases will be constantly be a problem and will get worse because i know a lot of friends who just spend what's in their bank account week to week. however unfortunately the media always blows up the statistics and there is a good majority of sensible home owners. which means that the price of houses is unlikely to suffer because in the end there will always be someone to buy. (and dont get me started on things like future pensions for people like me (late twenties), and the consistent bad diet and health the nhs will have to deal with in the future)

in my opinion, the economy will always ebb and flow. what worries me in the future is a Britain that will have two societies with a couple of exceptions. One society would have had parents that were able to own or home buy houses in the 80's and 90's . and the other society will just have to look on and watch.

Evan,
You, and other commentators, do not seem to consider the role of public spending's effect on growth rates and asset price inflation.
National debt inceased £37.6bn last year.More debt will be accumulated this year and into the future.
Problems will come when GB has to curtail this growth in debt in a more effective manner than this year.
Re-appraisal of Browneconomics will then surely begin as free lunch Britain feels the crunch

I'm hoping to be a first time buyer sometime towards the end of this year. I'm hearing so many mixed views on whether a crash is coming or whether it does reflect genuine shortage and the growth will slow and merely flatten out soon. I guess no-one really knows and of course a sure fire way to bring about that crash is for professionals to start talking openly of the "coming crash" thereby ensuring no-one buys. A definite self fullfilling prophesy. And naturally those very same professionals mostly have a vested interest in maintaining as much growth as possible, so I guess the truth is hard to come by.

It's a difficult guessing game I'm trying to play.

An increase in interest rates hits corporate borrowing & improves our exchange rate - hurting exporters & the economy.

As an aging population means more people who own houses have little or no mortgage outstanding, coupled with more younger people having to rent, this surely means that the reduction in personal borrowing is now being increasingly targeted towards just one sector of society.

Is there not a fairer way to slow the rate of personal spending down? At least 1% on VAT would raise some much needed funds for the chancellor while spreading the pain to everyone.

Come on Evan - get your thinking cap on!

Hahaha :)
In response to GOOD NEWS ON INFLATION blog by Evan davis. ( Read me on blog no 3.) I disagreed with the rate remaining same at the time. And also argued with the contrived logic also presented. Funny how things are not how he predicted.

Now let me tell you the next story which you will hear and read about the next few months. After the fall in house prices in the next few months there will be stories of misleading the common man. Who is in debt more than he can afford. And more and more people will start falling of the edge As if they were not already doing so at record number of Bankruptcy's ( I also call IVA as the same as I don't think there is any differenc apart from the name).

I'm not saying this for the sake of it. This talk has already started in America after the Sub prime lending debacle. Its just a matter of time.
Also I want people who puts these hypes should be jailed for playing with people's lives.

"Be a property millionaire", "Buy Property and become rich overnight". Heard all this before.

Watch this space.

I hope your prediction of only a quarter point rise will be wrong. Something simply has to be done about rocketing house price inflation.

Gordon Brown has permitted the economy to grow on the back of lax monetary policy. The manufacturing sector keeps getting smaller and the country is living beyond its means. Milton Friedman must be turning in his grave!

When a doctor prescribes steroids the patient quickly gets a boost but often the underlying condition remains. A price has to be paid when unwanted side effects kick in.

I predict our "steroid chancellor" can look forward to some unpleasant economic news in the months ahead.

rather than raise interest rates, why not use other options such as raising the bank reserves? This would partially avoid the cooling of the spending wouldnt it? And just another question which arises with the interest rate hike, what is more important (or which is larger) - Foreign Direct Investment, which currently stands at around 325 billion, or the subsequent damage to British exports?

Keith wrote earlier on:

"The equivalent committee at the ECB have an almost impossible task of containing inflation in France without causing problems for the German economy."

Er, inflation in France is 1.2% at the moment, while in Germany - thanks to a VAT hike - it is 2.0%.

Just want to make sure people realise that there are "Keiths" that are up to speed out here.

(A different) Keith

Perhaps Evan, you could discuss the impact of the debt markets on the economy. For example, it is reported today that KKR are planning a buyout of 'Alliance Boots' - the owners of Boots:

"KKR, together with Alliance Boots deputy executive chairman Stefano Pessina, will borrow £8.2bn of debt to finance the deal." - efinancial News

Of course, one _other_ consequence of an increase in interest rates will be to increase the value of the pound relative to the dollar, and therefore the Yuan, which is still basically tied to it.

So, increasing interest rates allows the China effect to continue for a few more months, which in turn allows the irrational exuberance of the consumer boom to continue for a few more months.

All of which could conspire to make the eventual "twang" that bit more pronounced....

I have for some time had the feeling that interest rates are becoming increasingly disconnected from the things they're supposed to control, but remain stubbornly connected to the things you'd really rather they weren't.

I mostly agree with your comments Evan. It also ocurrs that whilst the MPC is restricted to using interest rates as an instrument for controlling inflation, central government also has a big part to play. Inflation exhibits a cyclic effect and it is one of the roles of central government to counter downward trends in order to avoid a deflationary situation (these are indeed rare and undesirable)e.g. One of the instruments taken by central government is via the use of public spending. Therefore I do worry that the MPC's ability to control interest rates only is only a part of the picture and hence that its effectiveness may vary. Comments?

interest rates go up, mortgage payments go up, that increase goes out of monthly spend, retail receipts fall, businesses fail, "inflation only" pay rises - downward spiral which can quickly become an avalanche - I can see no way we could reurn to the high interest rates of the mid 80's without economic meltdown and consequences for the economy as a whole, pressures on social and health spends

I do not believe there will be a severe crash unless there is some major trouble internationally. I think a marginal slowing down for a year or two before things pick up again in earnest is far more likely. I do however think increasing tax on petrol was a bad idea.

Public spending has to really cool down there's no doubt. I'd look no further than the black hole that is the NHS (however unpopular).

Everyone seems to be panicking prematurely, including the markets. Cost push inflation is cited as a problem. Although rising in dollar terms to $62 a barrel, due to the rising pound oil is £31 a barrel, about the same as it was in Dec 05 when it was $55 and £31. The rising pound also mitigates the rise in the dollar price of other raw materials.

The 25%-30% annual rise in gas and electricity prices (which make up about 4% of the CPI basket) has added 1% to our inflation rate. Energy prices are now falling and were down 0.3% in March. Last years rises will drop out of the inflation figures over the next 6 months and CPI will lose that 1% it gained in the year to March. The BOE expects a sharp drop in inflation in the next 3-6 months and I agree.

Frankly house prices have little to do with consumer inflation. Rising house prices are a symptom of rising wages and low interest rates not of retail price inflation. If you raise interest rates house prices will fall (at least in real terms). There will be a lag but it will happen eventually.

My prediction? Inflation will fall, house prices will stop rising, wage inflation will be moderate, government expenditure and borrowing will be tightened and interest rates will start falling in early 2008. Calm down everyone!

As previous comments have stated, with M4 (Money Supply) growing at over 13% how can the result be anything less than an out of control economy!

I continue to find the official rates of inflation thrown about as gospel in the MSM to be laughable, I personally do not know anyone who experiences anything in the order of the CPI or even the RPI, and find it even more surprising that people would believe such figures given the huge benefits government and the financial community gain from their understatement.

To see the wisdom of government one only needs to look at the sale of more than ½ the UK’s gold reserves at the bottom of a multi decade bear market. But who needs gold right? One can only wonder why countries such as China and Russia are increasing their reserves and both Germany and France have for some reason thought to keep over ten times what we claim to have in our vaults.

We will pay a high price for our cake today, being a young graduate I will probably be one of the many young people left holding the bag.

My advice:
Rent & Buy Gold

Trying to 'control' inflation will never work as long as the BoE keeps printing money.

To J. Lawrence (post no.12). I think inflation is probably both demand pull and cost push right now. Demand-pull in our own economy, and cost-push from abroad.

Demand pull in that if inflation was being measured correctly (including property prices in the RPI, after all inflation is the cost of living!) then inflation should have appeared in the RPI figures a long time ago when G.Brown loosened monetary policy, and the rise in money supply increased aggregate demand (Keynesian economics), which probably caused the stock and property boom.

Cost-push inflation was held down (as shown in the CPI figures) as a result of falling Indian and Chinese goods and services. However, I believe CPI is now rising as the wages and costs in these economies are also going up. So we have imported CPI inflation before the pound has even weakened yet, which I think will come in due course as national debt levels put pressure on the pound.

Monetary tightening with interest rates should cool demand-pull inflation, but as your students point out, imported cost-push inflation may need to be handled by the other economies. Even so, monetary tightening should reduce aggregate demand in the UK for these imported goods and should at least reduce volume, even if not the unit price of imported goods.

I am becoming increasingly frustrated with the lack of focus on the regional, indeed local, nature of the housing market. Pundits and professionals focus all their attention on aggregate numbers or, if they do focus on local or regional housing market, then it is the London market they use. Prices in other parts of the country have changed dramatically differently from the aggregate or London figures. Rises in rates to cool an overheating London market will do untold damage to those regions where asset inflation is less. What is needed to control this is not an aggregate policy based on a single tool but regional intervention designed to address specific issues in specific markets. Let's have less economic myopia from the London-centric policy makers and more appreciation of what's happening on the ground outside the capital.

A concern is the rise in inflation will hurt many people who are stretched to the financial limits already and who are in debt with out of control credit cards etc forcing some people into IVA's, then who ends up paying for the unpaid debt to the credit card comapnies?

Alex (#42), money supply figures are notoriously unreliable (particularly M4) and bear little relation to the real world. Hence the decision in the early 1990's to abandon monetarism and to target inflation instead. A policy that has been a resounding success. As Mr king put it, "we did not abandon the monetary aggregates, they abandoned us".

The recent growth in M4 is largely "hot" money lent by financial institutions that are neither banks nor pension funds or insurance companies. In other words private equity, hedge funds and the like. It has as much to do with the real economy of making and doing things as Narnia.

The money is used to replace equity capital with debt and is largely borrowed overseas in the "carry trade" exploiting the difference between our soon to be 5.5% rate with lower rates overseas such as Japan's 1%. It has led to asset price inflation, mainly share prices. This increases the value of investments but there is no quick or obvious way for it to feed through into general consumption. The other point about the carry trade is it can unwind a lot quicker and catastrophically than it has grown.

At some point the Yen will shoot up, private equity lenders will go bust as they try unsuccessfully to sell up to pay off their yen debts, companies will get sold for peanuts, share prices will drop suddenly, M4 will collapse and headlines will shriek "disaster!". However, the real economy of making and doing things will carry on as if nothing had happened and inflation will bimble along in a mildly worrying 2%-3% band.

I would not worry too much - the first decision of the new PM, certain bloke called Brown, will be to take the interest setting power away from BoE - after all he gave it to them and what good came out of it???

With moments before the "big decision" I'll stick to my long held veiw and my neck out on no change using BoE's logic re base effects and Brown's very tight pay awards to public sector workers and overal tightening of fiscal policy.

Agree that interest rate changes have little effect given the complexity of this multi-tiered economy and the world being populated by Homo Sapiens and not Homo Economicus.

Speaking of which the herding mentality of the City calling for further rate hikes smacks of "misery loves company" and a fair amount of cognitive dissonance not to mention loss aversion.

I still go for no change, but if rates to go up then it will shake my faith in the MPC ie MPC is one that is reactive, loss-averse and prone to the presure of the crowd, unable to exercise the objectivity and analytical capabilties that should be inherent in these group of Homo Economicii (apologies for my latin)

Evan, how is it the BoE MPC is considered independent, and this is lauded as Brown's great (and only?) achievement as chancellor, when Brown has a hand in who sits on the MPC?

Can you tell us how nominations to the MPC work, and whether it's really independent.

Isn't it like a bullying tyrant claiming to rule a democracy but at the same time stuffing the ballot box?

Evvan makes a comment in his article on interest rates and house price inflation over his apparent scepticsm about a housing shortage. As someone who deals with this day in and dayout as a planning consultant, there is a marked shortage albeit it is regional and varied. Planning Authorities are supposed to plan for housing in accordance with future need and balance environmental factors. They dont. They pay lip service to this, often frustrate development even when planned.This leads to huge delays, very often these stretching into years. Multiply this across the uk, in-migration,increasing household formation, social changes and fluctuations in need and existing stock. Demand outstrips supply hugely. The same goes for social housing which for the most part comes off the back of general housing. This is a real issue and a main cause of housing and land price inflation.

Today the IMD World Competitiveness Yearbook 2007 puts the UK in 20th position but moving backwards.

The US was top again supported by the strength of its financial market and the ease with which venture capital for business development could be secured.

The UK trade deficit has widened again to £4.5bn this month and the deficit in goods has risen to £7.5bn.

Until and unless we realise that the UK's variant of the so-called Anglo Saxon Economic Model is badly flawed and that we cannot survive with such a hugely unbalanced economy then expect more trouble ahead.

Fair cop I got it wrong !!!

Congratulations to those that go it right.

I think rates have peaked and we'll be looking for reductions by the end of the year as low public sector pay awards, base effects in inflation and tighter fiscal policy bite.

My own cognitive dissonance is that I think the MPC may be playing to the crowd rather than acount for the evidence ahead.

Playing to the crowd is a loss averse strategy and my long held doubts about the MPC having courgae have found further support with today's decison. Better to please the crowd than to not lease it and suffer the consequences.

Lets hope the central banker's mightmare of stagflation does not rear its ugly head as a result of today's decision.

FWIW, I do think that the housing market is heading into a stagflation phase.

That is, a becalmed property market as vendors refuse to drop prices and the smaller number of properties trickling onto the market sell at very moderate rates of inflation (London excepted).

I guess we'll just have to watch very carefully the stats for the total number of properties sold over the coming months.

PS. Gordon will always get the money from somewhere, one juicy target being from increasing VAT, where he (or more accurately his proxy) can claim that any VAT increase is 'still within the EU average'.

A world bear market is long overdue and the world economies are being stretched like elastic. I would be very careful what I bought into at the present time. As an older member of the blog I have seen "onwards & upwards" a few times before, but the turndown always comes and usually so quickly that it catches people out.

Gordon,whilst in the backround, has been stealthily making Britain into a (he thinks non-reversible) Socialist Nation, at great cost to the voting middle classes. Soon we can watch his every move. He may find that he's got a bigger audience than he thinks! He will need to watch more than just interest(ing) ups & downs.

Just want to add a few more facts to this interesting debate.

1) Inflation is the rate of increase of cost of goods. As Merven King said it will come down I agree it will because with $78 a barrel oil to now $68 it will. But remember its the rate of increase you are still paying for the earlier rise.

2) CRR- Credit control ratio.
Circulation of money in the economy hasa 12-14% growth per annum. Now this growth will lead to inflation more moeny chaising less goods. Like more money chasing less housing stock. This is what leads to inflation

3) Fall of the value of POUND.
You might have seen that dollar is now 2 to 1. But you should also see that pound has fallen almost 10 %+ against some currencies. Like it was it was 89 Indian rupees to £1. Now it is 81 Rs to £1. A fall of more than 10%.
This means that you will have to pay more pounds for the same goods. This will lead to inflation

4) That sweetly lead me to my next point rising Balance of Payment deficit. Which is currently at 4.5 billion pounds for just the month of march 2007. How do you pay this money by printing more money. And what priinting more money get INFLATION.

5) High bonuses to a few. City few got £8,000,000,000 ( for those who can't get that figure is 8 billion pounds) bonuses. This is when money will chase few goods and not when the nurse gets 2% raise. For a nurse it will just go for child care and food. Its the few city boys which create the problem for the many.
Lets see are we going to see strikes for higer pay. Which will what we call wage price inflation.

Full circle. And then you are surprised why inflation is high. And it will come down. The factors need to be tamed for it to come down.

I think Blair knows that bad times are ahead and is picking a very opportune moment to leave. I have to admit, he's got timing, if nothing else.

Brown is going to have a nightmare to deal with (until he inevitably loses the election).

Blair will try to deflect the blame for his legacy onto Brown - that's what Blair does, you can't trust him!

About 2 years ago, I predicted that house prices would slide once rates hit 5.5%. Now we will see. I also can claim the job of a BNP Paribas economist, who said in December 06 that rates would move down next - I went for a rise in March 07.

The fundamental BoE failure was to cut rates to 3.5% in mid-03, which was just throwing petrol on the fire as UK has a liquidity trap at 4%. The BoE committee is not actually independenta s most owe their appts to G Brown and hence have always run rate policy below where it should be. Now, with property displaying its usual stickiness in pricing, we could be in for a repeat of Japan's last ten years.

Brown ahs just been lucky that cheap imports from the East have clouded the usual inflation structure and covered up the reals signs, which pointed to consistently higher rates.

Rates to 5.75% in September.

Simon (51), how can anyone say there is a housing shortage when rental yields are below the interest you can get in the bank? This indicates that there are too many properties available for let, and too few for owner occupation, not necessarily an overall shortage. Unfortunately, this misallocation is partly due to the belief that there *is* an overall shortage, and therefore self-fulfilling from an ownership point of view.

A reversal of house price inflation would remove this illusion, and should see a number of rental properties return back onto the market. While planning is important, the main task of the next chancellor should be to pop this bubble so everyone can get on with their lives.

HAHAHAHAHA I'm on a low fixed rate mortgage HAHAHAA

I just hope the MPC kill the inflation in the next few years -before my fixed rate period runs out.

What's up with all those whining people on variable rates? Didn't you see this coming?.

and as for you bandwagon-chasing buy-to-let whingers, if you weren't taking out loans you can't afford & buying up property to line your pockets perhaps the poor first time buyers would have a chance of a home of their own. I'm afraid I don't have much sympathy for you now the interest rates have gone up a titchy amount. Come back and whinge when they hit 15%.

I thought it was customary to reply to the odd comment on ones own blog. Does Evan ever do this? (I realise he can't reply to every comment.) Else the comment section is little more than a sounding board for all the nut jobs out there, myself included.

£1 trillion personal debt levels (is this really true?). Rising interest rates. Sky high house prices. It doesn't take a brain surgeon to work out what's going to happen. Another bubble's about to burst.

Market economics follows basic human behaviour. The Darwinist 'survival of the fittest' culture which has developed over the last 30 years is greed based, selfish and immoral. It has been fuelled by successive governments held to gunpoint by big business.

Let's face it, tinkering with interest rates is a pathetic way to try and deal with what is a deep social problem.

Last October I heard Evan say that interest rates would need to rise. I went down to my local building society where I got a fixed rate mortgage with no upfront fees at a very competitive rate. Two weeks later they pulled it but we are fixed now until 2009. There were lots of warnings about rates going up- I agree with contributor 61 why don't people have the foresight to do something about it? I certainly had no intention of paying an extra £80 permonth on my mortgage which is what it will be if rates go up again. I think the buy to let market has a lot to answer for- will my kids ever be able to buy a house?

On Interest Rates - IMAGINE

Imagine that the UK reduced interest rates to those of the ECB.

Imagine next that the UK, having aligned interest rates, joined the €uro - overnight!

Of course such an interest rate change would probably weaken the GB Pound a little vs the €uro - so imports would cost a bit more and UK exports would be a bit more compeitive in advance of joining the €uro.

However the cost of mortgage interest payments could be up to 30% cheaper. Presumably the UK government could then go to the polls and win an election in a wave of feel-good popularity!
It is fascinating to consider what would happen next to the UK - particularly as regards inflation, economic growth, the balance of trade, housing prices and UK employment.......

Would inflation rise without the higher interest rates?

Would the UK balance of trade benefit from increased price competitiveness?

Would economic growth lift initially? Would economic growth decline in the longer term due to the UK being physically on the periphery of the enlarged EU?

Would house prices rise due to cheaper mortgages and affordability?

I'm in the aviation bussiness,and know how everyone knocking it.
However has anyone thought how mutch it costs to get a bottle of natual mineral water from france to the uk?
Im more concerned with getting our boys in the armed forces home and safe!!
respect to anyone reading this,and take care, if you dont who will.

I'm in the aviation bussiness,and know how everyone knocking it.
However has anyone thought how mutch it costs to get a bottle of natual mineral water from france to the uk?
Im more concerned with getting our boys in the armed forces home and safe!!
respect to anyone reading this,and take care, if you dont who will.