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.

There's is a huge wealth divide & a lot is concentrated in the older generations so lots of people aren't feeling it.

Some people lost their jobs and businesses through the pandemic. Others had to carry on at their workplace.

Local businesses near to me are still suffering from the changes in peoples' habits.

Very much tongue in cheek, during the second phase of QE, known to most normal people as printing worthless money I raised the question about its use with the BofE. Fwiw, my cousin was a senior economist with them, representing them at IMF meetings, and then with Fitch before he retired.

The reply I got could be summed up as "you wouldn't understand, dear".

Couldn't be arsed to reply mentioning the economic problems in pre-war Germany as it was obviously a complete waste of time and effort.

Interestingly, in the 90s they had no idea what to do to restore the value of the pound. Every time there was a suggestion, someone piped up that they'd tried that in 19xx and it hadn't worked 'because'. When I rang for a chat on his birthday, the Matt cartoon in the Telegraph was suggesting 'shadowing' the rouble, in the days when UK was shadowing the deutschemark, keeping the pound high at 3DM, effectively the euro today.

Was on holiday in France when the pound crashed out of the EMU, dropped to 7FF from 10FF and interest rates shot from 10% to 15% overnight to stabilise things. Didn't work.

In the meantime, the BofE were given indepence and allowed to fixe rates themselves. Whether in the long term that will be good or bad I've no idea.

Energy prices

100% this, supply and demand in many sectors has caused prices to increase and hence inflation, however as most of price increases are on things we need like food, energy etc. people have to pay it so it keep inflation high. The only way to bring inflation down is things are priced so high demand drops because people don't buy it.

If the Ukraine war hadn't of happened we would have seen inflation as high as it is. It has really inflamed the whole situation.

Because Capitalism cycles between boom and bust

Heh, yes indeed, although you have missed “10 years of austerity” from your list, which left us weakened and not resilient, and the NHS was already running on fumes when Covid struck.

The Bank of England has a target to keep inflation down, but they only have one leaver, interest rates. Put it up people have less to spend, so inflation should come down, historically that worked, if you pay more for your mortgage you have less to spend on crap you don't need. But now lots of people can't buy that crap anyway and they can't buy other things either. One of the biggest drivers of this inflation is the war in Ukraine and fuel prices, inflation will do nothing to sort that, it will just leave us existing and spending as little as possible to get by.

Not all people that own outright are baby boomers. That stat of 36% home ownership outright is quite surprising. When workplaces offered redundancy during or just after covid a few people in their fifties that I know grabbed it, all outright home owners. These are the last generation that didn’t have to have a degree to compete. Of my friends maybe a quarter have a degree which is high compared to the general population in my age range, it was around 10%. It also meant we started working at 16 or 18 . My old workplace requires a Masters level degree for my old job now. I feel bad for younger generations.

Don't forget, you will be a pensioner one day and then will benefit from todays increases.

Greedflation is also becoming a real issue. Supermarkets/food manufactures are reporting record profits. The cost of food has gone up due to the energy crisis/demand for raw materials but alot of food related price rises are above inflation as manufactors increase there profit margins and blame inflation for the rise in product costs. This makes it really difficult to stamp out inflation as people have no choice but to buy food and carry on paying higher and higher costs.

@Orchidgal

Most of the inflation isn't due to high demand and surplus money. It's due to increased raw material costs, increased fuel costs, labour shortages, increased power costs, exchange rate deterioration, etc.

But yes, the govt (BOE) increasing interest rates is completely the wrong target, as that's what they do when inflation is due to too much money! So basically the wrong "solution" to the current problem! Trouble is it's the Bank of England who set interest rates and their instruction is to control inflation by changing interest rates! So they can't do anything else, even though it's clearly stupid!

Same thing happened in reverse though when interest rates were stupidly low - the BOE kept reducing rates to try to stimulate the economy which just meant the interest rates got lower and lower and started damaging the economy!

I thought Gordon Brown had cured that!! At least he kept saying he had!

PPs are right about it being very unevenly distributed.

The increase in mortgage rates, for example, has understandably been a huge story. But lots of people, probably the majority, are insulated from the full impact. And not just owner occupiers either.

People in SH aren't affected, and nor are a lot of those who still have a mortgage. There are going to be millions of people who are either years away from their next fix, or who have switched recently/will switch soon but just don't owe enough for the increase to affect them that much. There are some people who are really being fucked over by it, but they're not the majority of the population.

Food is the big one, I think. We all need that.

Average private sector pay increase is 7%, so the people you know are not representative

To watch BBC news it would seem as though the whole Country is on the breadline! Not true of course .Many people have plenty of disposable income ,can book holidays, and meals out, go shopping and so on. I think energy,food and so on are high at the moment.No idea what anyone can do about that as its essential! The Govt seems to be almost detached from any "decision making" as all down to BOE according to them! I cannot see how one rate rise following another, can be helpful to anyone at all . Like you, I am puzzled by their one aim of "getting inflation down " and using Interest rates to control it.Seems lazy and lacks any real imagination

Inflation where there is too much money sloshing about would be demand side inflation. What we have is supply side inflation: not enough of something to go around, pushing prices up. In our case that's things like energy and wheat, for example.
Companies are raising prices to cover (and then some, I'm sure) increased costs.

OP, everyone is not poor. The UK is one of the most unequal countries, in terms of wealth distribution, in the western world.

The problem that we are seeing today started in the 1980s, when the pay packets of higher earners grew at a much faster rate than the pay of lower earners. At the time, people didn't notice too much, because the economy was doing well, and everybody was benefiting to some extent.

However, now that the cost of basics like food and energy have gone up due to external factors, lower earners can no longer afford to live.

The problem is really one of inequality. The discrepancy between higher and lower earners is too large. Prior to the 80s, inequality was actually reducing.

@ACynicalDad Agreed.

I would also agree it is not due to wages. I do however believe a lot of this is being caused by people's psychology and how they personally deal with misery and hard times.

For example, I am a high earner although not earning much at the moment (by choice, as focussing on something that will hopefully earn me something in future). I am also not a big spender (due to being time poor due to my demanding job) although I buy quality stuff when I do spend- every 2 years or so. As a result, my spending habits (or tightening belt exercises/ cycles -I hate wasting money on crap) are never dictated by the economy. Added the fact that ( I spent years in college to get a good education and even more years and sacrifices to get a career) I hate feeling poor. So when the economy is down and most people on the street seem despondent, I find that I do not scrimp on anything "I Want, when I want it".

In fact, as I am lucky I can escape the UK too, even to see family abroad whose country's economy is run better so everyone is optimistic and happy - Naturally love people and like to see happy faces including those strangers, I do like to get away from the state of things that our country has become- so it means I was gone from Dec last year after Trussconomy and although was due back in Feb, I extended the travels until last month. I even spent one month visiting 8 countries -1) part of me thinking it was cheaper to do so as I was already half away around the world, and 2) to give me strength (read: prepare) to face the doom and gloom of our economy.

I am sure I am not the only one who behaves like this or close to this.

Well, in those 5 months (more so during the travels to the 8 countries in one month), my credit cards were used to levels I had never done before- and I am not a spendthrift nor do I like debts- so, psychology again must have something to do with it. Also, part of the trip , family members who are doing well themselves (country not ruined by politicians) covered costs naturally, so it evened out. So paid off the card by raiding savings I have held for 3 years (the exact amount held not accumulated) (sorry if this added to inflation) and can now again start saving as from next month.
*Currently mortgage rate switching, so when I was asked if I had savings, I said no and was embarrassed lol Did say I will start saving very soon and I now realise it is even sooner than what I thought.

This!!! Poor means something different now.

None of this make do and mend, cook from scratch, going without shit going on anywhere near me.

Everything way more rammed than it has ever been, why?

That includes executive pay rises, which are much higher than the rank-and-file payrises. If you look at median rather than average figures, it will be lower. 7% is still significantly below inflation, so we can't really pretend that's OK, particularly as some sectors haven't seen even inflationary payrises in over a decade.

Urrrgh, so irritating to see 'people' being blamed for the state of the economy and judged for wanting stuff/not wanting to be poor and live like misers in the fifth richest economy in the world, when in fact we are where we are, and inflation is where it is, because the government has stuffed the economy. And at this rate it won't be the fifth richest for much longer.

2008 recession- I did the same yearly- traveled abroad for annual holiday (only holiday I had) as was holding on to my flat, although again I was lucky I only needed to cover flight costs as family was doing well as their country is commodity rich and has a near zero credit card spending culture so they felt no effects of the recession. It was 'nice' to feel normal for 4 weeks of the year for nearly 6 years. I treasured seeing those happy faces abroad and despaired at the state of our country when I returned. I love people and like to see happy faces including those of strangers.

I wish I'd stayed in local government 40 years ago.

Neighbours to my left both retired NHS their pensions are so much better. They fly first class even to Australia.

Neighbours to my right both retired teachers again their pensions so much better. They're thrifty and squirrel the money away.

Next door to them one NHS one local government. They've spent 100k they say on their house builders been in nine months now. As well as a hack off of all render and replacement to k rend they've knocked down the old conservatory had built a proper extension with a beautiful kitchen. I could spend all day in their new bathroom walk in shower, jet bath.

I could kick myself for quitting local government but it was soul sucking. We've a small private pension so can't complain but inflation is frightening.

Of course they're not. People with no mortgage and a healthy savings pot are enjoying huge benefits from all the interest rates rises.