Should we have a national ‘no spend August’ to help lower inflation?

[ALady78]

Like many people I’m really concerned about high interest rates. We’re actually still in a fixed rate mortgage deal until early 2025 so I was hoping things would calm down by then. But now they’re saying interest rates will have to go higher than previously thought and I’m already panicking about what we’re going to do.

So if the idea behind higher interest rates is to curb spending then why haven’t they clearly said this? I’ve got this from the Bank of England website today:

‘Higher interest rates will make sure inflation comes down by affecting spending habits in the UK.

This happens most directly if you have a mortgage or you are paying back a loan.

Either way, you may have to spend more on these things. And that means you will have less to spend on other things that are captured in theConsumer Price Index (CPI) measure of inflation. This is the measure of inflation that the Government asks us to target.

Food, housing, transport, and household bills are everyday essentials. You can’t choose not to spend on those. But you may put off buying other things.

Also, higher interest rates may mean you are less likely to want to take out a new loan to buy things unless you need to.’

If this is the case shouldn’t we all stop spending immediately on things which aren’t essential? No new household items, takeaway’s, days out, clothes etc. I’ve carried on as normal at the moment because we can, but I would stop if it would help. I mean, I know they always say ‘interest rates have been increased to curb spending’ but then why doesn’t Rishi hold a press conference and CLEARLY request us to stop buying ‘stuff’ if that’s what they need us to do?

Is the solution for us all just to stay in and buy only basic food for the rest of the summer?
But then won’t people who make or provide ‘non essentials’ lose their jobs if we stop so how does that help?

Letting inflation run rampant = companies get more money and eventually inflation reduces when enough people can't afford things.

Raising rates = government gets more money and eventually inflation reduces when enough people can't afford things.

Encouraging people to reduce their rampant consumerism = people keep their money and eventually inflation reduces because people aren't buying things.

Tbh OP it's a better idea than the current status quo ideas!

But what would be best is government working to increase supply. Making deals with oil countries, manufacturing countries, agriculture countries. Removing barriers and encouraging flow of goods into the UK.

Any demand-side scheme will only ever end up with reducing standard of living. Only supply side initiatives will maintain the standard of living.

99% of politicians are too thick to understand it though! Keep raising those rates!

I do pay NIC and PAYE. I don't draw a pension. I personally have never had a job that paid over £18k p.a.

The reason our mortgage is paid off is because it was low to start with. My first mortgage was for a one bedroom house that cost £19k. The biggest mortgage I have ever had was £50k.

Which is my point. It's not the interest rates that are the issue per se, it's the incredibly high cost of property to start with. Interest rates go up and down, but it's very difficult to budget for this when you are stretched to capacity. 2x main salary was the criteria when we took out our £19k 100% mortgage. I have no clue what the criteria is now? How many body parts you can sell on eBay maybe?

We did didn't we.

and toilet paper castles

🤣 what a brilliant response!

That's not how bank loans work in this century.

If you get a loan from a bank, you don't get money off other people's deposits. The bank essentially creates the new money for the loan and most money creation in the economy happens in this way through commercial banks, not Bank of England printing money.

See for example the Bank of England itself on this - https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf

Otherwise see these articles: https://www.sciencedirect.com/science/article/pii/S1057521914001070 and https://www.sciencedirect.com/science/article/pii/S1057521914001434.

I’ve tried to explain previously on here about have the money doesn’t actually physically exist. What followed was ridicule and piss taking.

It’s eye opening how many people have mortgages but never thought to plan for potential interest rate increases.

For those who did plan, their prep is unlikely to have included a pandemic and land war in Europe simultaneously. Stress testing only works so far. My household have a mortgage and are fine, but that's not because we saw the current economic situation coming.

StormShadow

I have a mortgage too. And was sensible enough to buy within my means.

As usual the middle classes expect those at the bottom to suffer for their poor decision making.

You first OP.

Main employer has a payfreeze on until 2024, my hours were cut by 40%, I'm angling to get a 2nd job which will pay 80% per diem salary rate of existing job. I'm doing my bit for pay deflation already.

Ultimately, the idea that the current situation is something that could realistically have been planned for doesn't survive contact with reality. Nobody was stress testing for this, and no amount of vague generalisation will change that.

I agree. People borrow to their limits and fail to plan for things out of their control. No-one could know there was a pandemic around the corner, but those of us who have been around for many years know just how fickle life is and many of us take that into consideration. People have been saying interest rates would eventually rise for some time and were basically told they were talking nonsense.

Again though, while it was clear that artificially low interest rates wouldn't last forever, what none of you knew is that it would coincide with both a pandemic and a Russian invasion of Ukraine.

I can’t remember exactly now but they usually do that thing where they put in higher interest rates and say that’s what it would be - the mortgage advisor that is

Stress testing? Yep they used to. Not with 2023 energy and food prices though!

True. It’s so expensive.

OP you remind me of posters who suggest we just print more money to solve issues.

What an odd response.

Of course I know inflation happens for many reasons. But Tory rhetoric is not a primer on inflation - it's political propaganda.

The trouble is that this isn't a traditional wage - discretionary spending - inflation cycle; it's been driven hugely by energy costs driven by global energy prices, which in turn were (mostly) driven up not by increased demand but by artificial scarcity.

The energy crisis came on top of the post-Covid supply chain and economic bounceback issues including in shipping; without the Ukraine war those would probably have worked themselves through by now.

And of course in the U.K. we exacerbated our problems with Brexit - massively constraining the available labour base overnight, increasing trade friction and therefore the cost of imports . We always knew we were going to see inflation on certain products with Brexit, it was pretty much inevitable.

So cutting discretionary spending via interest rates is unlikely to have the same impact as a demand-driven inflationary crisis.

And the trouble is that central banks don't have the tools to deal with inflation that is driven by these sorts of pressures (apart from the full employment/wage increase issue). Basically all they have is the supply of money and interest rates. And they are fairly blunt, painful and ineffective tools in this kind of economic environment.

@JassyRadlett I think that’s right.

@Reality25 Companies have costs! Many of them cannot put up prices to match costs because sales would fall. This will be a massive problem for them. Indeed putting up prices adds to inflation and is a massive issue for everyone. However if companies cannot sell their goods and services, they make people redundant. Ultimately they go out of business. No one is safe from inflation.