Category Archives: Inflation

Inflation vs Deflation

In the most common sense, inflation is an increase in the average price of goods over a period of time. The rate that prices increase is known as the inflation rate. Inflation happens either when costs go up or when it takes more money to purchase the same items.

CPI is not the same as inflation. Inflation is the change in CPI over a period of time. It can be calculated as [CP1 Year 1 - CPI Year 2]/CPI Year 2, where Year 1 is greater than Year 2. Using the example above the inflation rate from 1984 to 2009 would be 95%. That’s (195-100)/100.

Using CPI is not necessarily an indicator of the specific inflation rate for any given consumer since the goods and services you buy might not be included in the basket. Instead, CPI and the inflation rate is an approximate cost for the country as a whole.

Monetary inflation happens when the money total in circulation increases faster than the amount of goods in circulation. The government is the only entity who can do this. In the old days, they would simply produce more cash. Today, the government purchases securities from banks, thereby increasing the money supply.

Inflation can possibly lead to deflation. In theory, people would spend less money when prices are rising, but that is not always what occurs. In practice, people spend the money now because they believe the prices will be higher in the future. If they don’t have the cash for wanted purchases, then they borrow it.

Another disadvantage to inflation is that it puts some goods and services out of reach for consumers. Rarely do wages increase the same rate as inflation, so consumers have less cash to spend. As the gap between income and costs closes, so does spending. That situation could eventually lead to deflation.

Typically, deflation is when the average price of goods falls. When the inflation rate drops below zero, indicating negative inflation, we know that there has been deflation. Remember that the inflation rate is calculated based on the change in the Consumer Price Index, or CPI.

Inflation and deflation are both parts of a normal functioning economy. They typically happen in cycles and can correct themselves without any government intervention. However, in extreme situations, like the Great Depression, the economy does need a helping hand from the Feds.

im seeking http://tinyurl.com/dktx98. I am looking for, Debt Agency.

Interest rate dilemma for Bank of England

There are mounting fears that the Bank of England is losing its grip on the economy. A combination of rising food costs, fuel hikes and other price rises are stoking inflation which should mean raising interest rates for the Bank.

However as a result of the global credit crunch, banks are starting to hoard money instead of lending which is putting downward pressure on house prices and pushing the monetary policy committee (MPC) towards actually cutting the base rate. Even in this atmosphere of falling house prices, would-be buyers are finding it hard to secure a home loan to make a purchase they can now afford.

The credit squeeze has created much uncertainty in the economy and the nine MPC members seem very reluctant to actually cut interest rates. The members are facing a dilemma in that domestic inflation is heading in one direction while at the same time the international money market is actually going in the opposite direction.

When the Consumer Prices Index went up by 2.1% – which is above the government target of 2% – it would, under any other circumstances, signal an increase in interest rates in order to bring about higher borrowing costs. The interest rate at 5% is still an expansionary rate which will only fuel higher inflation, putting inflation up again to a more neutral level will hopefully neither dampen nor stoke the economy.

However the credit crunch is pulling for interest rates to come down. Uncertainty in the banking sector has prompted banks to cut lending to other institutions and instead hoard cash. Customers are reporting difficulty in securing personal loans, especially for debt consolidation, as lenders are either unable to access the funds, or simply unwilling.

Bank of England governor Mervyn King has warned the MPC that the credit crunch could get even worse in the coming year unless interest rates are cut.

Heightened fears for UK housing market

More and more existing home owners are find it harder to sell their homes as fears of recession keep people from moving. But in an ironic twist, first time buyers are unable to take advantage of the new low house prices because of a lack of affordable home loans on the market.

The growing concern over the state of the economy is making many people more unwilling to overstretch themselves by buying a new home now. New figures published by the Halifax have shown that house prices fell by their sharpest rate in more than fifteen years in May.

Many buyers were hoping for a fall in borrowing costs when the Bank of England dropped the base rate to 5%. However, lenders have been unable to pass on the cut as the Libor rate remains high and liquidity low. Loans of all types have been affected.

The Bank of England is due to announce its latest interest rate today and is widely tipped to leave the rate at 5%. Consumers may feel this is a blow, but with the Government worried about inflation, the Bank is unlikely to cut the rate again yet.

Halifax’s chief economist, Martin Ellis, said: “The decline in prices is caused by the difficulties created for potential house purchasers by the rapid rise in house prices in the last few years, a squeeze on spending power and the reduction in credit availability,”

Halifax warn that house prices could continue to drop next year. This is potentially good news for those waiting to afford their first home, but may still not be enough to counteract the credit crunch.

Britons have seen their wages rise 4% in the past year, a stark contrast to the 9% rise in fuel prices seen and the 7% increase in food costs.

Sadly for many, property rental prices have also been increasing as more buy-to-let investors pull out of the market, leaving a diminishing pool of properties available for rent.