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.

Well, part of it is the closure of so many venues and shops over the last few years.

But also, some of the activity you're seeing is people cutting back. Someone who used to go out to an expensive restaurant every week but now goes to somewhere mid range because they're belt tightening is still going out. Someone who used to buy M and S but has switched to Primark is still in the shops.

Going without something doesn't mean a person is going without anything.

Cos your money is losing value in the bank account. The savings rate doesn't match inflation. Do you remember when you were a little kid and you put all your pennies in the piggy bank ... how much actual money did that amount to after 10 years.

On the other hand, the cost of things like travel are only going to increase so we are trying to experience as many countries/things as we can until we are completely priced out. We have planned or are going for 8 mini breaks this year, while making sure we bung £1k extra into the mortgage every month. We will get priced out of such activities eventually unless we double our earnings (so looking to do that as well), so might as well enjoy it while it lasts.

Inflation is high when prices go up. The normal mechanism for prices going up is that workers demand higher wages so that businesses need to put up prices in order to still make a profit, so ultimately no one benefits but the people whose wages increase a little sooner than prices catch up experience a little flush of affluence during the lag-time before things get back into balance, so a lot of people feel they got a little bit richer even though once the equilibrium point settles again they can't actually afford anything they couldn't previously afford before the pay rise. This is the inflation we had a lot of in the 20th century and it made a lot of people feel rich. I remember my someone gleefully explaining to me in the 80s that it was totally fine for them to have an interest-only mortgage on their £50,000 house because inflation meant that in 20 years time, £50,000 would be a relatively small amount of money and that whilst they only owned 10% of the building initially, eventually the house would be worth over £200,000 but he would still only owe the same amount and would own 75% of the house instead of 10%

Currently prices are going up independently of salary rises. Energy and raw materials costs are high because of supply-and-demand issues mostly triggered by the war in Ukraine. Businesses which can't produce their products at full capacity because they can't fill all their staff vacancies due to covid and brexit may also have to put up their prices because they need to divide the fixed costs of doing business across a lower total output of goods produced. So the price rises are happening first, and then workers are demanding that wages should keep up with that inflation but the lag is in the other direction - so instead of a little flush of affluence there is instead a perrilous time of instability and poverty during the lag between prices rising and incomes catching up (if they ever do - many workers are getting below-inflation rises) so no one gets that feeling of being a little bit richer that you get with "normal" inflation.

How can we all lower our spending when energy prices and food prices are so high?!

The boss of British gas is earning 4 million in bonus due to huge profits.

Printing money to the tune of £450bn for all the Covid measures will do it with absolutely no problem

Yeah, that helped too.

I can't understand it either, but can I just say is rein, rein, rein. Not reign. It's driving me barmy!

In a world where autocorrect is ducking everywhere, it's never going to happen.

Generally I have learned to tune out spag oddities in online forums. Unless they really make a post ambiguous or plain unintelligible.

And as you have proven (you meant to say "it's" not "is" in your first sentence) https://en.wikipedia.org/wiki/Muphry%27s_law is a real thing.

Don't be too quick with the "government turned on the taps" explanation. This is a live debate in the US, where people literally got pandemic cheques for hundreds of dollars, so arguably there's some demand-side inflation there. And the size of the US government's Covid stimulus was pretty huge, though again economists disagree about whether it was so big it became inflationary.

In the UK the same conditions aren't present, so we shouldn't import US talking points uncritically. QE was present for several years without causing inflation - it's the external conditions that have changed. Which is why rate rises are such a blunt tool for dealing with it.

Don't be too quick with the "government turned on the taps" explanation. This is a live debate in the US, where people literally got pandemic cheques for hundreds of dollars, so arguably there's some demand-side inflation there. And the size of the US government's Covid stimulus was pretty huge, though again economists disagree about whether it was so big it became inflationary.

The thing is - and it comes as a surprise to some - the US is effectively a whole (under populated) continent which practically infinite natural resources. What may or may not work there is not really directly translatable to the UK.

While it makes perfect sense for most US states to have more than one bank operating solely within the state, it would be fuck all use to someone in Surrey if their bank only operated in Surrey.

This is why privatisation was such a con. Remember how eventually all those hip, funky "energy" companies morphed into market dominating big players.

"So why is higher interest rates the answer?"

It isn't. Current inflation is largely based around food and energy prices, neither of which are going to be cured by raising rates as everyone needs to eat.

There's also greedflation whereby shops, supermarkets and other businesses are cashing in and raising prices but blaming it on inflation. The US Fed has conducted its own investigation and found evidence of this in the States but for some reason the BoE refuses to conduct a similar investigation here. Probably because it doesn't want to tell businesses to stop exploiting their customers in a time of need. Remember this is the same BoE that told us we "need to face being poorer".

Quantitative Easing (printing excess money) was used to stem the financial crash but it was only ever intended as a short term measure. Instead the government ran it for over a decade to inflate house prices - a core driver of UK economy - and artificially keep rates low. Rates were always going to rise as the 0.1% rates were an aberration (historic average is around 7.5%) but gov pretended this was the new norm.

The gov/BoE could have slowly risen rates over the past decade but instead tried to deny reality and are now faced with a situation where we are dealing with the economic backlog of 2008 all in one go.

In short, those in charge pretended we could carry on spending after the crash and we chose to believe them.

In short, those in charge pretended we could carry on spending after the crash and we chose to believe them.

And there's the weasel "we" ....

I never believed them, and neither did millions of others. We may be dragged down as well, but with the powerful anger of knowing we did our best and were defeated by a corrupt system that even now is trying to pretend it's 13 years in office were someone else apparently.

Quantitative Easing (printing excess money) was used to stem the financial crash but it was only ever intended as a short term measure. Instead the government ran it for over a decade to inflate house prices - a core driver of UK economy - and artificially keep rates low. Rates were always going to rise as the 0.1% rates were an aberration (historic average is around 7.5%) but gov pretended this was the new norm.

yeah QE & the distorted house market has ducked the economy

There are multiple factors at play in the UK, some of which are global issues and some not so much. Its something of a perfect storm.

This is the reason. Plus the £ is weak due to Brexit so imports cost more.

Thanks Tories.

Interesting thread, good to read people's perspectives. Certain sectors of society are going to suffer greatly I fear. We have an ever expanding and sometimes overly generous welfare state that is simply unsustainable. Coupled with the ever increasing demands on the NHS. Older demographics are doing very nicely as are some on benefits. Those in trouble are the working classes especially those with Help To Buy properties
We cannot keep safeguarding particular demographics and the NHS and DWP whilst destroying the education system (for example). Massive reform is required and fraudulent activity needs to be stamped out, and we should recognise and reward the strivers in society. Interest rates increases are not the answer as they essentially punish the undeserving

That's all very well.

Now how do we solve it by voting either a Tory or Labour government ?

Well, you're right not everybody bought it. But I used "we" as a large enough proportion of the country bought into it because they wanted to keep having expensive houses-as-assets and shiny new car to PCP every few years.

Just like I think it's important to use the "weasel we" when talking about people who voted for a government that pushed this onto us. The majority of England voted for Cameron and Osborne's austerity, of which we are now greatly paying the price. And they voted for Johnson, paving the way for Trussenomics.

I'm not saying Labour don't have some culpability but the English electorate really do need to stop voting for d*ckheads.

Isn’t the cause and effect the wrong way round? Everyone is so poor because inflation is high?

At the upper end wages are rising like mad. I'm in a well paid occupation and wages have risen 20% in the last couple of years. My own wage has risen by approaching 24%.

I'm in the south east and no one seems skint! Cafes/restaurants/pubs are packed, everyone seems to be driving new range rovers, teslas, audis etc. Lots of expensive holidays, nice clothes etc.

The only thing people are noticeably cautious about is mortgage rates - that bomb clearly has yet to go off.

The majority didn't, in either case.

https://en.wikipedia.org/wiki/2019_United_Kingdom_general_election_in_England

https://en.wikipedia.org/wiki/2015_United_Kingdom_general_election_in_England

https://en.wikipedia.org/wiki/2010_United_Kingdom_general_election_in_England

47.2% of English votes in 2019 were for the Tories, 40.9% in 2015 and 39.5% in 2015. The electoral system did the rest. Can't be arsed working that out as a percentage of the population rather than votes cast, but those figures are all bad enough on their own without making them worse!

(As an aside, we really had a lot of GEs in the 2010s didn't we? I think I'd forgotten there were 4).

Sorry, didn't realise that was going to link to a picture of Honest Boris.

I'm not saying Labour don't have some culpability but the English electorate really do need to stop voting for dckheads.*

This. Ffs how bad does it have to get for the populace to realise, the conservative party really aren't on your side.

They don't like:

• single parent families
• working mothers
• sahm
• disabled people
• children, until old enough to be economically productive
• people who are just not terribly academic or skilled, or otherwise arent ever likely to have the potential for high earnings
• public sector workers
• immigrants unless from richer countries on investment visas

This covers probably most families yet they get elected time & time again. I never cease to be amazed.

I wouldn't say the welfare state is overly generous. Some sections are perhaps. There's definitely a conversation to be had regarding pensions.

I'd argue it's more a case of reforming it (as you say) to work more efficiently. And that means reforming our tax systems.

A large proportion of benefits go to people who are working and don't get paid enough from their jobs. So pay people a better wage? Yep, certainly they should be paid fairly. But then people want cheap stuff and cheap stuff comes with a cost of cheap labour.

Same with our taxes. People don't want higher taxes but they want better public services - hospitals, dental surgeries, schools, trains etc. If you want Scandinavian level services then you pay Scandinavian level taxes.

I think we need to start asking ourselves want we want and how much we are prepared to give.

And stop voting in d*ckheads.

That discussion needs to also include how we tax unearned income and wealth vs earned income.