Suppress inflation and 'grow' the economy

[Mike4]

I see the government (ok, Sunak with his list of 'priorities') has the goal of halving inflation this year. From what I've read, the only mechanism for reducing inflation is raising interest rates to the point where a recession occurs. The BoE has raised base rates every month for a year and show no sign of stopping, so that one is probably in the bag.

Yet at the same time the government (ok, Sunak with his list of 'priorities') also claims to have the goal of growing the economy. I.e. the opposite of a recession. Are these two goals compatible? If so, how?

Many thanks for any illumination.

[GoSeigen]

I see the government (ok, Sunak with his list of 'priorities') has the goal of halving inflation this year. From what I've read, the only mechanism for reducing inflation is raising interest rates to the point where a recession occurs.

This is absolutely not true. There are many things that can be done to reduce inflation.

The BoE has raised base rates every month for a year and show no sign of stopping, so that one is probably in the bag.

Yet at the same time the government (ok, Sunak with his list of 'priorities') also claims to have the goal of growing the economy. I.e. the opposite of a recession. Are these two goals compatible? If so, how?

Many thanks for any illumination.

The premise was wrong so the rest doesn't follow.

GS

[monabri]

If Sunak wants to halve inflation and reckons he can...why did he let it get so high in the first place?

[Mike4]

I see the government (ok, Sunak with his list of 'priorities') has the goal of halving inflation this year. From what I've read, the only mechanism for reducing inflation is raising interest rates to the point where a recession occurs.

This is absolutely not true. There are many things that can be done to reduce inflation.

The BoE has raised base rates every month for a year and show no sign of stopping, so that one is probably in the bag.

Yet at the same time the government (ok, Sunak with his list of 'priorities') also claims to have the goal of growing the economy. I.e. the opposite of a recession. Are these two goals compatible? If so, how?

Many thanks for any illumination.

The premise was wrong so the rest doesn't follow.

GS

And the "many things that can be done to reduce inflation" are?

[Tedx]

This is absolutely not true. There are many things that can be done to reduce inflation.



The premise was wrong so the rest doesn't follow.

GS

And the "many things that can be done to reduce inflation" are?

Inflation can be a result of lack of competition.

Fiscal, rather than monetary policy (or a combination as us poor Brits can testify).

[Mike4]

And the "many things that can be done to reduce inflation" are?

Inflation can be a result of lack of competition.

Fiscal, rather than monetary policy (or a combination as us poor Brits can testify).

Hmm... I hadn't really considered that changing tax rates would have the same effect as changing BRs but I guess it must do. Thanks.

Increasing tax rates and increasing public spending must therefore, at the same time bear down on inflation and increase the GNP. So I wonder why not do this instead of cranking up BRs.

[gryffron]

Increasing tax rates and increasing public spending must therefore, at the same time bear down on inflation and increase the GNP. So I wonder why not do this instead of cranking up BRs.

I don’t see how that follows.

If the increase in tax take is the same as the increase in govt spending, then there is exactly the same amount of money chasing the same amount of goods & services. So it should not affect inflation or GDP at all.

Gryff

[Mike4]

Increasing tax rates and increasing public spending must therefore, at the same time bear down on inflation and increase the GNP. So I wonder why not do this instead of cranking up BRs.

I don’t see how that follows.

If the increase in tax take is the same as the increase in govt spending, then there is exactly the same amount of money chasing the same amount of goods & services. So it should not affect inflation or GDP at all.

Gryff

I took Tedx to mean increasing tax has the same effect on inflation as increasing base rates. I then interpreted this as giving the gov more money to spend instead of the banks getting it. And then the gov spending it increases GDP. But I'm only guessing as the answers to my OP have been sketchy at best.

[gryffron]

I took Tedx to mean increasing tax has the same effect on inflation as increasing base rates. I then interpreted this as giving the gov more money to spend instead of the banks getting it. And then the gov spending it increases GDP. But I'm only guessing as the answers to my OP have been sketchy at best.

I think:
The govt can take money OUT of the economy, by increasing taxes and paying down debt. (which will tend to dampen demand/inflation)
OR
The govt can pump money IN to the economy, by increasing spending and national debt. (which is inflationary)

So back to your OP: "Can you achieve growth with low inflation?"
It's possible. To achieve it really requires a PUSH from the supply side. i.e. If private businesses can be persuaded to produce more, operate more efficiently, then you could get both at the same time. You need to encourage domestic producers to produce more, without putting up their prices. Extremely hard, at the best of times. But even more so at the moment because:
1) Unemployment, is already low. So there's no ready pool of workers to take all those new productive jobs.
2) I don't see any British political party really offering any positive supply side measures to help or encourage domestic employers. Deregulation has sometimes achieved it in the past. e.g. Banks in the 80's, Bookies in the 00's.
3) The b word - shush.

Gryff

[Bubblesofearth]

If the increase in tax take is the same as the increase in govt spending, then there is exactly the same amount of money chasing the same amount of goods & services. So it should not affect inflation or GDP at all.

Gryff

That would be my read as well. AIUI most of the inflation the UK has experienced has been down to money creation by private bank lending, e.g. for mortgages. It is exactly this lending that will be damped by rising IR's. Less lending, less money creation, less inflation.

BoE

[Adamski]

Inflation should have come down when the oil and gas price fell. However we've got sticky inflation due to food price inflation remaining high. However the supermarkets have said this should start to fall now. Also inflation is sticky cause the big rise in minimum wage has pushed up wage inflation. My guess would be our inflation will fall but at a slower rate than the US and EU for those reasons.

[Tedx]

One of the primary functions of tax is to remove money from the economy. Less money =........

[Bubblesofearth]

One of the primary functions of tax is to remove money from the economy. Less money =........

Isn't the main purpose of tax redistribution rather than removal?

BoE

[AsleepInYorkshire]

This is absolutely not true. There are many things that can be done to reduce inflation.

The premise was wrong so the rest doesn't follow.

GS

And the "many things that can be done to reduce inflation" are?

I know of one which is reverse quantitive easing but I can assure you I have no idea what the hell that is about

AiY(D)

[gryffron]

One of the primary functions of tax is to remove money from the economy. Less money =........

Yes, but that’s only half the story. If the govt spends the same money it takes, then no net change.

Gryff

[spasmodicus]

Yeah, I'm worried about inflation too.

When a country prints money (QI), it debases its currency relative to others and if it's a net importer (say of energy) this will result in inflation, which becomes a self sustaining feedback loop if allowed to get out of control. However, between about 2008 and 2020 every country was printing money so this didn't happen and UK's exchange rate was not adversely affected. When one country (the USA) started to raise interest rates and started tapering off QI, the Bank of England sat on its hands. In the USA a lot of the QI funny money had found its way into the stock market, resulting in spectacular gains for several years in a row followed by a bear market last year. In the UK the FTSE, as usual, performed dismally while Brexit and Covid happened and our govt. stoked house prices by removing stamp duty etc. giving people an illusion that things could carry on as before.
Inflation is no surprise, given the entitlement culture that now exists in the UK, exemplified by the recent news of a scheme to pay people a "universal income" for doing nothing, presumably so that we can all afford the fruits of modern civilisation, e.g.


child minding costs
central heating
internet costs
gym subscriptions
Netflix/Disney/Amazon subscriptions
smart phones and home computers
working from home
dishwashers
cars
eating out a lot
food fads
cosmetic surgery
getting your bike "serviced" at a bike shop for £100
everybody going to university
imported out-of-season foods
take-away meals delivered to house
frequent foreign holidays
expensive pets and their associated vet bills, not to mention the eco problems caused by moggies gobbling up froggies and the cost of disposing of doggies doo-doo
heat pumps
etc. etc.

There's plenty to cut down on, methinks

It's hardly surprising that we have a productivity problem in the UK when dealing not only with the cost, but also the negative consequences of all the above. (car broke down, so couldn't take kids to child minder, but 3-year old dropped mobile phone down toilet, so couldn't inform partner, or phone to get dishwaher repaired, or pay for anything, because banking app on phone required password to transfer cash.....meanwhile partner could not get home because of train strike....)

And talking of current train strikes, whatever the outcome, the settlement will be inflationary and the effects of the strike are also inflationary because they clearly reduce productivity across all sectors of the workforce. Paying people in exchange for them producing nothing, or paying them too much for what they do produce is equivalent to printing money.

I would go to the pub to drown my sorrows about all this, but at 6 quid a pint, I feel that the pub is doing too little to justify this price, i.e. banging a drink costing 2 quid down on the bar, while a bunch of people in chef's outfits hang around in the background waiting to sell me sausage and mash garnished with quinoa seeds for £16.

rant over
S

[dealtn]

Are these two goals compatible? If so, how?

A) In the long run countries with low and controlled inflation have better foundations for (higher) economic growth

B) In the short term a solution to a country with higher than desired inflation (presumably with the intention of aiming to follow A, above) is to reduce relative economic demand, which is a reduction in current economic growth, and on occasions an actual decline eg. negative growth

They are compatible but need to viewed through the lens of short and long term.

[Tedx]

Yeah, I'm worried about inflation too.

When a country prints money (QI), it debases its currency relative to others and if it's a net importer (say of energy) this will result in inflation, which becomes a self sustaining feedback loop if allowed to get out of control. However, between about 2008 and 2020 every country was printing money so this didn't happen and UK's exchange rate was not adversely affected. When one country (the USA) started to raise interest rates and started tapering off QI, the Bank of England sat on its hands. In the USA a lot of the QI funny money had found its way into the stock market, resulting in spectacular gains for several years in a row followed by a bear market last year. In the UK the FTSE, as usual, performed dismally while Brexit and Covid happened and our govt. stoked house prices by removing stamp duty etc. giving people an illusion that things could carry on as before.
Inflation is no surprise, given the entitlement culture that now exists in the UK, exemplified by the recent news of a scheme to pay people a "universal income" for doing nothing, presumably so that we can all afford the fruits of modern civilisation, e.g.


child minding costs
central heating
internet costs
gym subscriptions
Netflix/Disney/Amazon subscriptions
smart phones and home computers
working from home
dishwashers
cars
eating out a lot
food fads
cosmetic surgery
getting your bike "serviced" at a bike shop for £100
everybody going to university
imported out-of-season foods
take-away meals delivered to house
frequent foreign holidays
expensive pets and their associated vet bills, not to mention the eco problems caused by moggies gobbling up froggies and the cost of disposing of doggies doo-doo
heat pumps
etc. etc.

There's plenty to cut down on, methinks

It's hardly surprising that we have a productivity problem in the UK when dealing not only with the cost, but also the negative consequences of all the above. (car broke down, so couldn't take kids to child minder, but 3-year old dropped mobile phone down toilet, so couldn't inform partner, or phone to get dishwaher repaired, or pay for anything, because banking app on phone required password to transfer cash.....meanwhile partner could not get home because of train strike....)

And talking of current train strikes, whatever the outcome, the settlement will be inflationary and the effects of the strike are also inflationary because they clearly reduce productivity across all sectors of the workforce. Paying people in exchange for them producing nothing, or paying them too much for what they do produce is equivalent to printing money.

I would go to the pub to drown my sorrows about all this, but at 6 quid a pint, I feel that the pub is doing too little to justify this price, i.e. banging a drink costing 2 quid down on the bar, while a bunch of people in chef's outfits hang around in the background waiting to sell me sausage and mash garnished with quinoa seeds for £16.

rant over
S

Thanks for that caller. And now on the Jeremy Vine show....

[scotview]

I see the government (ok, Sunak with his list of 'priorities') has the goal of halving inflation this year.

Yet at the same time the government (ok, Sunak with his list of 'priorities') also claims to have the goal of growing the economy.

Many thanks for any illumination.

"Suppress inflation and 'grow' the economy"

I think they are mutually exclusive.

Oh aye, just one more thing , we don't make anything anymore, so there isn't much of an economy to grow, we all just buy stuff (from China).

[GoSeigen]

MV = PY

There are four terms in that equation, including V the mysterious velocity of money. People saying things like printing money causes inflation unless all countries do it simultaneously are ignoring some of the above terms and looking at the question too simplistically. They may argue that their comment assumes all else is equal -- which would make the narrow point correct, but not really applicable to what's going on in the actual economy because those other terms are rarely unchanging in reality. It was assumed by Friedman-style monetarism that Q would be constant, yet we've seen it decline dramatically in recent times, which called into question many of the tenets of monetarism and prompted Quantitative Easing, expanding base money (whereas it was thought prior that the quantity of (base) money should be kept constant).

The government is also just one element in a varied economy. It's too simplistic to say that if the government does X then Y will happen, for similar reasons to the above: there are not just two variables and a constant Y=cX, there are many moving parts. As has often been pointed out even government financial management has been split onto fiscal and monetary areas. Then there is the private sector, consisting of financial vs non-financial business, services vs goods etc not to mention trade, all of which have their own effects.

Central banks, traditionally the overseers of inflation, are in a heck of a bind because 1. in many cases fiscal policy is not helping and 2. their balance sheets are stuffed with gilts and much more sensitive to interest rates now than in the past, and the consequence of rising rates is CB losses which inevitably are going to be funded directly from the fiscus. If policy makers are not sufficiently aware of the pitfalls (e.g. they are listening to the MMT crowd) there is a real danger that inflationary pressures get out of hand. This is where I see the greatest risk: loss of control of public finances, both fed by and masked by a misplaced focus on supply chain issues. We probably won't implement as bonkers policy as Turkey for example but we are a couple of steps down that path already IMO.

GS