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.

Your premise is flawed..."when everyone is so poor". Not even close to everyone is poor. There is SO much money floating around, go to any high street and look at the full bars and restaurants and shops. Tons of people have plenty of money to spare.

I'm doing better than ever (still in the middle, but better) and most people I know are doing just fine. (Not in UK but have family there)

You are correct. Inflation is not being caused by people having too much money or a wage/price spiral. Raising interest rates won't solve it -in fact, it isn't solving it, as we can see. The Tory Party/BoE are out of ideas and don't really care all that much.

I think the only thing that will save us is that the UK is much less uniform - yes there are people being squeezed, but there's also a serious number of people who own their home outright, with no need for mortgages. And there are a lot of people for whom the recent interest rate rises and CoL have meant they have actually had to budget (shock horror) for the first time, and not just buy what they want when they want.

People are more likely to fix their mortgages, so there's a constant flow of people coming to the end of their fixes and remortgaging, rather than a big bang of people who are on SVRs.

You must be lucky to have rich friends and family then.

The country is on its knees.

The main thing is high demand for a limited commodity. It’s not that everyone is loaded, but things we all need are in limited supply. I think the current situation in the UK is driven by the high gas prices and increased government spending to try to cover it. Brexit and Covid also affected the workforce (lowering production) by making it harder for people to move around for work. I think the war in Ukraine has hit some sectors of food production as well. Caveat: this is my very limited understanding of it! If someone can explain to me why gas prices are so high (supposedly through necessity because of limited supply) while gas companies are raking in record breaking profits I’d love to hear it

There seems to be no care about the human impact of massively rising mortgage costs.

Actually I think there is slow realisation that renting and high prices are affected more and more people as there are starting to be more stories along those line.

Though:

This model estimates that in 2020, across all local authorities in England, there were 23.2 million households living in 24.7 million dwellings.
Of those 24.7 million dwellings, just under two-thirds (64%) were estimated to be owner-occupied in 2020. For most of this analysis, this is broken down further, giving the following four tenures:

• 8.8 million (36%) were owned outright
• 6.8 million (28%) were owned with a mortgage or a loan
• 4.8 million (19%) were privately rented
• 4.2 million (17%) were in social rent, mainly rented from housing associations and local authorities

https://www.ons.gov.uk/peoplepopulationandcommunity/housing/articles/researchoutputssubnationaldwellingstockbytenureestimatesengland2012to2015/2020#:~:text=Of%20those%2024.7%20million%20dwellings,a%20mortgage%20or%20a%20loan

Some of those 6.8 million may also have very low mortgages/loans as well.

If the 19% are younger much less likely to be Tory voters - so won't have anyone caring to much last decade or so and it's only recent research that suggest long term that may badly affect them as people get to middle age with less stake in society.

Most of those people who own their homes outright are Boomers/pensioners. They are also the ones who are more inclined to believe there's no cost-of-living crisis going on because they're more shielded from it than the working population.

If you're on £30K a year and trying to service an ever increasing mortgage and bills, with your boss offering you a 3% annual payrise if you're lucky, you bloody well know there's a cost-of-living crisis going on.

Agree with this one! You have

• supply side inflation (related to high energy costs and brexit - shortage of labour and higher import costs )
• demand side inflation (people having more savings to spend post lockdown)

I suspect now it's mainly supply side inflation in the UK.

UK has the highest inflation at this moment than euro and the US (10% vs 8% vs 5%). Hence you can see we are hit by a combination of the most shite in the UK compared to other regions.

The Ukraine thing set it off with energy prices spiralling (it's an international market, so the uk has no real ability to control/influence pricing and global inflation). And then everything you buy has an enery cost - in it's manufacture, distribution etc. So the knock on effect of the energy prices have driven up the costs of pretty much everything, it's just taken a while for that to percolate through to the high street.

Low interest rates have caused house price inflation over the past decade.

Also, the govt have increased the NMW significantly the last couple of years. This year they put it up 10%. As well as having an energy cost, every product has a labour cost. For many businesses, labour is their biggest overhead, so an increase in wage costs will also filter through to higher product prices. The risk is that this then causes an inflation spiral, because workers need more money to maintain their standard of living.

So the government as significantly responsible for inflation, despite their claims that they don't want it (either they're liars, or idiots). Rishi think's he's intelligent, but really he's thick as pig shit. He was the chancellor that gave us the stamp duty holiday that kicked off the house price inflation, and the recent min wage increases. The same moron that cost us billions through allowed BBL fraud to be so easy. And between the govt and the BoE (govt puppets), they are responsible for the stupid interest rate rises that are stalling (or crashing) the housing market and will probably lead to a recession. Yes rates had to go up. But they were too low for too long, and now they've left it late to start increasing them and are overcompensating. Why they can't see that a) uk interest rate can't control global inflation, and b) that there's a huge lag between putting rates up and the knock on effects is beyond me.

But why is it so much worse here in the UK ?

Wages in private sector have not kept up with inflation, no where near.... if they were, we wouldn't have so many people leaving the labour market.

What is interesting is that many companies are making profits that are higher than pre pandemic levels..... in the case of Supermarkets, substantially more.

Shortage of labour is clearly a contributing factor but outside the tech sector, there's not much evidence of huge payrises to attract talent - that is really only going on at executive level. At 'shop floor' level, people are on national living wage, and wages are stagnant across a broad range of industries.

Despite the labour shortages, companies are now looking at making layoffs/not filling roles as they're being asked by clients to cut margins. So it'll be interesting to see where this goes and how it will affect inflation. I still think we'll hit recession soon. BUT if there's a wage/price spiral going on, it's happening with executive pay and not across the general population. Can't see the Tories doing anything to curb executive pay somehow.

Most of those people who own their homes outright are Boomers/pensioners. They are also the ones who are more inclined to believe there's no cost-of-living crisis going on because they're more shielded from it than the working population.

I agree.

My parents worried about heating costs this last winter as one is very ill and needs it warm but IL have wood burner and lots of stacked logs but it's only in last few months they've started to moan about price increases with food something we've been worried about and dealing with for 12 + months.

I am incredibly lucky that I managed to pay off my mortgage this year. wasn’t sure if I could do it and had to free up investments to do it but it’s gone now. I was looking to rent a room in my house to do this. My energy bills aren’t huge either due to lagging of attic etc.

I personally haven’t seen much increase in salaries in my sector most are sticking.

I don’t have a huge amount extra to spend on holidays, nights out etc so I’m careful with what I do. Friends who do holiday and go out a lot appear to have a magic money tree but they’re mostly couples, I’m seeing someone but not really in couple zone yet.

Interest rates increasing have given me an incentive to save but also to double check pension as though got private contracted out of gov one years ago so may be shortfall.

I know of at least friend who is mortgage free and wanted to retire early (at 50) but with COL increased living expenses (utilities and food) she’s having to work for now as her private pension won’t cover all bills etc or could retire but have to get a part time job.

Hard agree!

following on from my previous reply, BOE has a limited tool box to suppress inflation. raising interest rate is suppressing demand side inflation but can't do any around supply side inflation, which is harder to tackle.

it'd be down to fiscal policy to do something, for example, tax even heavier on energy companies. if you Google, energy companies like BP are making record profits. Hence you'd imagine they are passing the costs straight onto you even as the energy costs have now calmed down quite a lot since war began. just a Google search on oil price can tell you the historical prices.

Think I read somewhere that for years energy companies have been manipulating energy prices using loopholes in law, and the government is trying to plug this loophole (need to find the news article about it ).

Isn

Sorry, isn't this Brexit plus pandemic plus Ukraine and truss tanking the economy?

well i know nobody struggling financially really - everyone still going out for dinner / drinks very regularly - all the pubs and restaurants rammed / cant get a table when i go out without bookings etc

friends still having holidays and off too all the music festivals this summer -business as usual !

so no not everyone is poor.

But why is it so much worse here in the UK ?

https://www.theguardian.com/business/2021/sep/24/how-uk-energy-policies-have-left-britain-exposed-to-winter-gas-price-hikes

Lack of gas storage.

We import more food - 3rd biggest importer in world.

Hostile environment from home office, brexit, covid restrictions - covid meaning increased retirement in 50s age group and aging population - all lowering number of workers available and long standing disinclination to train workers up and give them needed skills.

This is interesting:

Food price caps, not raising interest rates, is the right lever to pull in tough economic times.
https://www.theguardian.com/commentisfree/2023/may/31/the-guardian-view-on-food-price-caps-better-at-taming-inflation-than-rate-hikes

Reversing Brexit would also relieve pressure on supply chains. Not that that will happen.

The Tories have done a lot to make this situation much worse than it needed to be.

UK still has the worlds or one of the worlds highest energy costs, food too.

Both could be capped by the Govt, esp energy, we still produce much of what we use.

Instead its interest rates but they do not have the power they used too and are causing Gilt yields to rocket, making gilts worthless.... next a pensions crisis!

Cannot agree with you more. Excessive stimulus plus stamp duty holiday are not what we need to be honest to deal with a pandemic lockdown. And agreed the points around wasted tax payers money due to easy fraud, as well as tories getting their friends to sell PPE at a higher price. again at the tax payers costs.

Instead, Dr Weber looks at the problem through the lens of distributional conflict between workers and companies. She argues in her latest paper that firms with market power can hike prices, and a widespread acceptance that they have a chance to cash in leads to “seller’s inflation”. Workers react by attempting to protect real wages. From this perspective, labour conflict is not the origin but the consequence of inflation.

This does sound like more of the problem currently - the energy price cap and the talk of limit on cost of food basics all from Torys does suggest even they are thinking this - I don't see the Torys being in power after next election so may be there will be some movement with this.

Again, you're assuming that is typical and it isn't. It may be true in London but go to a non-affluent town (such as mine, even though I live in the South East) and restaurants aren't just half empty, they're all closing down. The Town centre is mainly vape and charity shops. It's covered in litter, rats and drug addicts. Despite this, housing rental prices and mortgages are so expensive that they're pushing local people out of the area. And food bank usage has gone up something like 3000%. Not an exaggeration. They're under so much pressure locally that they too may have to close.

You can still go to festivals and on holiday but be belt-tightening. I'm on a decent salary and can afford to do this stuff, so long as I am careful, but I am still worried about money, as a single parent with a mortgage in a very unpredictable and unreliable economic environment where layoffs are a very real possibility.