How is inflation high when everyone is so poor?

[Orchidgal]

Please explain to me like I am three.

The explanation I have received is:

Everyone saved loads during the pandemic and the government printed and handed out loads of money.

So, there is too much money sloshing about in the economy, causing prices to rise (inflation) and so the government put interest up to stop people spending and borrowing more.

Except that bit about there being loads of money so needing to reign everyone in doesn't make sense to me. Everyone I know is financially stretched.

As far as I see it prices going up has nothing to do with people ‘having too much money’. So why is higher interest rates the answer?

I don’t geddit.

No takers?

Trussonomics.

I don't get it either. But I think it's not the usual situation of where inflation goes up, as you explained it. I think it's caused by something else, but I'm not sure what it is...

Awaiting responses too

Energy and food prices are higher. This leads to higher prices in just about every area.

The traditional "hike interest rates to dampen inflation" response isn't working because that only works when people are buying things they don't really need. In the current circumstances higher interest rates just makes people struggle even more.

As PP.

Energy and thus food production prices are higher.

Wages are being increased in the private sector to keep up with inflation.

Shortage of workforce means wages rise further.

Hasn’t there also been an effect from shortages of lots of things, partly due to reduced production capacity during the pandemic? Therefore prices go up due to lack of supply of some goods?

Most people I know in the private sector haven’t had a pay increase, though. Mine was 1%, pushed up to 1.5% after union involvement. It’s very difficult. People are taking on second jobs.

The BoE seems to blame inflation, or particularly the lack of expected deflation that was forecast by now, on the absence of joblessness and wage inflation.

War in Ukraine => higher fuel bills (Europe gets gas via Russia) and also impacts food directly (Ukraine has large crops) => cost rises.
Brexit = more barriers to trade = more costs => higher prices
Covid knock on

Higher prices => inflation => people having less spare cash.

I heard (somewhere on radio 4) that although lots of people don't have money, enough people do to keep paying higher prices - and they do pay them so inflation keeps going up.

Plus a lot of it is food inflation - presumably reflecting the fact that energy costs went up post Russia's invasion of Ukraine (and lack of cheap Russian oil and gas), raw materials costs went up because of shortages, and labour costs went up, again, because of shortages (post-Brexit). Sainsbury's was saying they put wages up three times in the past year - but all of the supermarkets have put up wage costs, so are trying to get it back through food prices.

But also, as many will remind you, CEO pay is also reported to have gone up lots - reflecting high levels of profitability. So their costs have gone up, but they're trying to prioritise shareholders and the only place to go then for profit is raising prices by a lot.

(But probably by the time I have finished writing this post, several people will have said it better...)

This plus the fact the value of the £ has decreased which has made everything we import more expensive and we are a net importer.

This is quite an interesting read www.bankofengland.co.uk/explainers/what-is-inflation

I'd like to have someone explain the various economic models and possibilities to me too!

Printing money devalues the pound. Britain has massive imports, which all cost more. Inflation rises due to the amount of imported goods in the basket used to calculate inflation

Also, a lot of the things that have soared in price are basic staples that we don't have the option not to buy.

For e.g. my energy consumption is down year on year for the last 4 years - I can't lower it any more, but my spending on energy has more than doubled.

Same with food. I'm buying less/lower quality/fewer treats but my spending has increased.

It feels like the BOE has one tool so they're using it, whether it works or not.

I heard (somewhere on radio 4) that although lots of people don't have money, enough people do to keep paying higher prices - and they do pay them so inflation keeps going up.

In addition, the biggest price increases are on necessities like food, housing, energy bills. So people don’t have a choice to not pay the higher prices. People are cutting back on how much food they eat, and energy they use - some going into debt and some using food banks. Repossessions of homes is on the rise (banks taking home from people who can’t pay their mortgage increase), many renters are being forced to downsize or move to cheaper areas as they can’t afford a rent increase.

The Tories are NOT the “party of economics” but stupid British people believe they are.

If you give poor people money they spend it on the things they need, stimulating the economy.

If you give rich people money, they siphon it off to the Caymans, bypassing our economy altogether.

A very good question, and even the experts don't agree on the answer. Economics twitter is a shitshow right now (and indeed always)

IMHO it's a combo effect:

There was some post-pandemic bottleneck inflation going on - because people who'd saved money in 2020-21 splurged on holidays, eating out etc in 2022. I suspect that's mostly worked its way through by now though.

The pandemic also caused supply chain disruption, which is to say the goods we import were harder to come by for a while (shortages of microchips from China, for example, where lockdown measures upset factory production). So you have the same amount of customers chasing fewer goods, which means prices go up i.e. inflation

Then you have the energy price spike caused by the Ukraine war. This creates inflation both directly (our energy bills go up, and they count for calculating inflation) and indirectly (more expensive energy means more expensive goods and services when businesses have to put prices up to cover their costs).

So no, it's not coming from wages. It's not an overheating economy creating the inflation (we wish). But the Bank of England still tries to squash demand by raising interest rates, and the government still tries to hold down public sector pay because they are afraid allowing wages to keep up with prices would contribute to more inflation. Which is, depending on your point of view, a legitimate fear of second-round effects, or a bullshit hangover from the wage-price inflation of 1970s, which was a different problem altogether.

HTH...

Triple lock pensions...

Good question OP!

Surely ordinary people just can’t handle the double whammy of interest rate rises and inflation for much longer?

Interest rate rises don’t seem to be helping - they just seem to be helping the banks clean up - and it seems to me the govt surely needs to try a new tactic

I understand the reason that prices and inflation are going up. What I don’t understand is how raising interest rates is supposed to help.

I heard (somewhere on radio 4) that although lots of people don't have money, enough people do to keep paying higher prices - and they do pay them so inflation keeps going up.

That’s interesting ^
So is it basically inequality again? Wealthy mortgage free people with loads of money in savings are booming right now and keep spending, while those in debt have to balance the country’s books by paying extortionate interest rates?

If the people doing the spending aren’t the people doing the borrowing, it isn’t going to add up!

Very interesting, thank you.

I understand the reason that prices and inflation are going up. What I don’t understand is how raising interest rates is supposed to help.

There is an old adage that when the only tool you have is a hammer, every problem looks like a nail.

In this case, all the other potential avenues of controlling the economy - universal income, infrastructure investment, forms of wealth tax - are precluded by ideology.

Rising interest rates basically mean people spend less money.

Savers have an incentive to keep it in the bank. I was getting 0.1% on savings not so long ago so where was the point - might as well spend it. Now it's worth actually keeping in savings.

Flip side is borrowers have to pay more back.

In both cases less money is being spent on consumer goods, cars etc. etc. People think more carefully about buying properties because of the interest rate.

Less demand means prices will fall thus bringing down inflation.

That's the theory but unfortunately a perfect storm of falling supply of food and energy - reasons including BREXIT and Ukraine means that prices are increasing anyway because demand still outstrips supply. A PP explained the problems with China and electronics as well. However, without the increased interest rates it would be worse.

Ooh I've never heard that one before, but I'm definitely stealing it!

I was speaking to an accountant about the CoL crisis and he was saying that, with previous recessions there was a clear reason and a clear light at the end of the tunnel, but that's not the case with this one. He said he's never seen anything like it in his 30+ year career and he really doesn't know what's going to happen.

The government wants us to save for old age but only in ways that allow people who gamble with money to get rich.
People with savings get done over regularly and have done for years. There'd have been less money put in BTL if interest on savings was not lowered to nothing.