To not understand why the answer to inflation is to raise interest rates?

[BluebellBlueballs]

Is it to make everyone so poor due to mortgage rises that they cannot afford to buy as many things?

Cheap often means old with associated higher maintenance costs and poor fuel economy. This poster may have a commute where it would be dangerous for an old banger to conk out on their commute. Or may have a job where people rely on them to be there on time without ringing up to say “sorry my car broke down again.”

It’s too simplistic to shrug and suggest that people downgrade the things they’re buying. People are often already doing this to get by and have been for a few years now as costs rose. What do you want people to do, live in a hovel and wear rags?

Interest rates being so low for so long was the problem. Cheap debt hurts everyone.

tedious knee-jerk reaction. There aren't two extremes of "tax nobody and everyone for themselves" and proper communism.

There is a difference between states and individuals owning the means of production (and properly running them for the benefit of the state and its citizens) and a few people with vast wealth benefitting from everyone else's labour. Marx (for example) recognised the need for the private ownership of some businesses etc, but believed that (some of the) wealth should be redistributed from those who have more than they can ever need/spend, to those who have need. (think in particular of those unable to work, people with disabilities, health issues, children, too old)

A good system of proper progressive income tax, coupled with properly applied corporation taxes which are properly deployed by an efficient government would be the goal.

I know people wanted a mortgage
I know that people need a house and that house prices are really high.
I know mortgages are stress tested to see the effects of increasing interest rates.
I know people couldn't have predicted the high inflation, the increase in fuel costs etc, energy costs.

But I do wonder if people really realised the effect of increasing interest rates on such high mortgages? Or did they just think it couldn't happen?

There is only so much leeway in a budget and so much disposable income people have.

OTOH - there are plenty of people who own their home outright, who are on good incomes, and who are saving and spending a lot of money. Do they need to be encouraged to stop spending - and why would they?

He does have about 20 kids, as does Boris. Those Eton school fees won’t pay themselves…

well, quite. This is why we’re having all the NHS and teacher strikes. Because they’ve had years of below-inflation pay increases but they’ve all still got years of mortgage to pay for. If their mortgages are going to go up hugely then they have to be paid for somehow. It’s not like the immediate effects of supply and demand like in, say, the hospitality industry where staff wages have HAD to go up in order to attract staff. Because without staff you don’t have a restaurant. The increased costs are passed onto customers. But with NHS and schools, you simply can’t get to the situation where you can’t recruit staff because they just can’t afford to work in those jobs. Yes they’re a vocation but people have to live, they aren’t slaves, grateful for crumbs. And as their salaries are government funded we are stuck in a situation where the government tries to say it can’t pay the increases. And working people on lower salaries then fall closer and closer towards poverty.

It’s all a mess and I don’t know what the answer is. I do think that very senior people in private industry should maybe think about forgoing their massive bonuses just for doing their job, and pass on some of that profit right down to the bottom rung of their workforce. Distribute the wealth much more evenly.

I doubt many people foresaw both the interest rate rises and the wider circumstances in which we find ourselves now. In fact, if anyone claims to have considered that we might end up with a pandemic and an invasion of one of the world's major breadbaskets by one of the world's major energy suppliers simultaneously, I doubt I'd believe them.

But even then, what else were most people who've bought a house going to do? The majority would've presumably been in private rentals instead, and they're getting fucked over with the interest rate rises too. Worse so, if anything, since lots of homeowners are actually pretty well insulated from them. Obviously some people have bought a more expensive property than they needed and will now struggle when they wouldn't have done if they'd stayed in the starter home, but this is far from universal.

How can this work when it is the cost of the basics - food and heating, that is eating peoples money.

We have to spend money on that. Are they going to raise interest rates to such an extent that people stop buying food?!

i also don’t know who people think will work in childcare in a couple of years. It’s just so low paid. A couple of nurseries near me have already recently stopped their wraparound care provision because they just can’t make it profitable anymore. That in turn puts pressure on working parents. We are bringing our precious kids into a situation where there is now no way for parents to afford to take career breaks or go part time to care for them themselves, but even when they work the childcare provision is becoming too unaffordable or simply not available at all. People will choose to have fewer children and that will bring with it a whole raft of problems in 25 years time.

But even then, what else were most people who've bought a house going to do? The majority would've presumably been in private rentals instead, and they're getting fucked over with the interest rate rises too. Worse so, if anything, since lots of homeowners are actually pretty well insulated from them

Quite - get a house with a cheap mortgage and then see that mortgage rise later on

Or

Stay in a rental and see that rental cost increase much later on.

There is only so much money some people have - and they need a place to live.

Meanwhile, there are plenty of people who are untouched by mortgage rate rises and rental increases and the general shortage of affordable housing in either the rental sector or actually buying a house.

There are indeed. If anything, it's probably a majority of homeowners who are fully or somewhat insulated from the rises. As well as those who own outright, even as a mortgagee there are lots of people whose fixes aren't up for a while yet and/or who don't owe that much. If you've only got eg 50k outstanding and another 10 years, even going from 1% to 6% is like another hundred a month. That would obviously be money some people don't have, but equally, there are going to be lots of households where it doesn't change anything much.

Whereas private renters seem to be getting shafted in much greater numbers in this situation. Residential mortgages are the thing that seems to get talked about the most, but they're probably a minority of the picture.

And all this talk of mortgage help - I wonder what this would look like?

How would you define who needed mortgage help?
Just like with the help for energy bills - who actually needed help?

I did pick up a bit this morning from economist (former BoE possibly) talking about the model changing

More people are on fixed now than previously so it takes much longer for the hit to filter through

I also found the article below interesting however spending is tricky due to massive debt racked up over Covid and Ukraine energy crisis

They do say tax corporations and the rich (it’s from a union) but again people and corporations are mobile and seek attractive rates

Ie we / they are using out of date modelling as mortgage market has changed

Up for debate like anything around economics

They certainly are. A family member works in a senior role in centrica and got an eye-watering six figure bonus thos year on top of a massive basic. They've made a shit ton and he's said it's a PR nightmare and everyone told not to discuss bonuses with the outside world ( myself excepted!)

The man on sky this morning with Sophy ridge was very insightful , but like most economists and anything money related a lot of it I didn't really understand. He did say that helping people with their mortgages wouldn't be a good idea as it would lead to more inflation.
People are still spending , which surprised me tbh. They are not behaving as the government think they should do , but the reason behind this I've no idea.
Seems nobody is sure how to tackle any of it and interest rates will probably go up again,

I'm sure that the utility companies are loving these higher prices and less competition too ( as a few of them went bust last year )
It's the CEOs and the ones on the big salaries that will profit from it all as mentioned below !
Doesn't surprise me, but its sickening and they hold us all to ransom unless you live off grid.

There are people who have a lot of money - and who can afford to spend.

DF - final salary, no mortgage, on his 3rd European holiday. And why not?

I don't know how he could be persuaded to stop spending as he has plenty of disposable income.

Yes, but I think the man on sky today seemed surprised that people were still spending and not just those that really can't afford it. That's what I took from his interview anyway

Sorry , I meant those who couldn't afford it were still spending money.

Those pointing out that raising interest rates isn't working are right it isn't - yet, but that's coz there are only a few million mortgage deals being renewed each year. There's a cumulative effect over time, so BOE is waiting for the effects to kick in.
To those asking why are they using this monetary instrument to tackle inflation - its because they don't have another one.
As a bank, you only have so many options, print £, borrow £, tinker with rates. BOE have been doing all 3 simultaneously, which doesn't inspire confidence. Just smacks of desperation.

Honestly it seems pretty obvious to me.

Some people are struggling a lot but don't have anything much to pare back. Some people are better off because they have substantial savings, so the higher rate of interest gives them more to spend. Some people aren't that affected by greater costs due to existing fixes or no housing costs. And some people can afford the higher housing, food and energy bills without having to worry about cutting back.

There are certainly people being really fucked over by this who also have been able to reduce their consumption, but there probably aren't enough of them to outweigh all the others.

I think also the experience of covid and lockdown has meant a lot of people are unwilling to miss out on things. Communal FOMO. Not everyone, but it doesn't have to be everyone in order to have an impact. People are singing from a different hymnsheet.

EXACTLY. This is why the pension triple lock must be abolished. Political parties protecting pensioners coz they fear political repucussions of that cohort. So regressive. Most pensioners own homes, decent incomes, yet get pension increases and winter fuel allowance etc.

The man on sky news this morning was making the point that ( so far ) getting inflation down isn't working and the banks are not used to their tatics not having the effects it had a few years ago.
Which is why they will probably put the rates up again.

Beneficialchampion2 communism has never existed anywhere in the world except Cuba. And no ones suggesting it either, so it's a shit argument.