GAS and the cost of living

[lurksalot]

On 11/06/2023 at 21:07, tegs07 said:

Then try Wage price Spiral (symptoms of inflation) and find out what the MPC is, what their remit is and what factors they are targeting. (attempts to ‘cure’ inflation). Wage price spiral is a contentious topic but nevertheless it’s something the BOE have said they are targeting on several occasions.

One thing I don't understand is why wage increases to doctors, nurses, police and fire brigade would increase inflation, there wages don't get charged out to consumers and the Govt could just print more money to pay them, It might sound daft, but I've seen a few argue this.

[tegs07]

1 hour ago, lurksalot said:

One thing I don't understand is why wage increases to doctors, nurses, police and fire brigade would increase inflation, there wages don't get charged out to consumers and the Govt could just print more money to pay them, It might sound daft, but I've seen a few argue this.

 

**For quick answer skip to the bottom**

 

There are arguments that any overall increase in the money supply is inflationary. Where, who and how that money comes from does not matter.

 

That’s pretty much my point about QE which was basically “printing” and increasing the overall volume and velocity of “money”. This money found its way directly (purchasing on the high street) or indirectly (purchasing of assets such as property) into the economy driving prices up as well as propping up the price of government bonds.

 

As the supply chain was broken due to recession in 2008 and again during Covid the effects were exasperated as more money was chasing fewer goods and services. The Ukrainian situation has also had a massive impact.

 

Central banks have a very blunt tool to curb the increase in prices and that is hikes in interest rates. The theory being people will stop spending and the economy will contract rather than grow. Usually the indicators lag resulting in a recession. 

 

Its worth remembering also the government have no money other than what is raised by taxation. The rest is debt - effectively gilts sold to investors. When inflation is high investors will not want to buy gilts (government i.o.u) without an additional premium. Who wants to tie up money for 2 or 3 years at 4% when inflation is double that?

 

”Printing” is not a normal state of affairs. Raising money through taxation and bond sales is the norm.

 

QE was supposed to be an emergency measure and one that is having delayed ramifications. The government didn’t “print” rather central banks did on their behalf.

 

They basically electronically created credit (bank reserves) to purchase government bonds. The aim was to provide a crutch to support gilt prices and the long term aim was to sell the bonds on to 3rd parties when they hit maturity and had to be paid back. (i think this is correct? someone clarify if not please).

 

In a similar way high street banks also need to raise funds to offer mortgages. Some comes from existing lending deposits and loans (reserves) but the rest needs to be raised in the money markets.

 

With inflation and more importantly inflation expectations so high these banks are facing a premium to do borrow and this is being passed back to borrowers in terms of much more expensive fixed rate mortgages.

 

Inflation when it is entrenched can destroy an economy.

 

 

****IF YOU want to skip to a quick answer:

 

To be very brief governments don’t print they tax. Any gaps between what they can’t raise in tax and what it costs to run the country (the deficit) is financed through selling bonds (debt which has to be repaid).

 

Any* cash that finds its way into the economy will lead to inflation. Some inflation is seen as positive. (Why bother to innovate or be productive if your money makes the same stuffed under a mattress) but when inflation gets out of control (too much cash chasing too little goods and services) it causes havoc. To tame it you need to either contract the money supply (tighten credit and restrict spending) or turbo charge the goods and services produced (Truss wasn’t totally mad just utterly delusional).

*wages

** lottery wins

*** booming property market 

etc

 

Edit: The above is a simplified answer so has some omissions.

Edited June 16, 2023 by tegs07