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Inflation and deflation

 
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Blue Peter



Joined: 24 Nov 2005
Posts: 1939
Location: Milton Keynes

PostPosted: Fri Jul 22, 2005 4:05 pm    Post subject: Inflation and deflation Reply with quote

There have been suggestions that we may face inflation or we may face deflation as PO begins to bite. Obviously, which occurs could crucially affect any strategy that a person might have.

I can understand that as the prices of oil and natural gas rise, then this will tend to increase inflation.

However, at the same time, we seem to be at the top of a housing bubble and have about a trillion pounds worth of debt (collectively). As I understand things, retail sales are currently quite low, probably because of debt and also because of the weak housing market (a lot of people make large purchases when they move house ? kitchens, bathrooms, furniture, etc. ? and they aren?t moving house now). This would make it quite hard for retailers to raise the prices of non-essential items. If they can?t sell it now, they?re not going to be able to sell it when the price is higher. This would seem to have a deflationary tendency.


Is this a correct reading of the situation? And if so, what would the outcome, inflation-wis,e be likely to be?


Peter.
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Ballard



Joined: 24 Nov 2005
Posts: 826
Location: Surrey

PostPosted: Fri Jul 22, 2005 8:47 pm    Post subject: Reply with quote

I'm also trying to work out what the long term trends will be. If we are entering a long-term period of inflation driven by increasing fuel prices then what will the Bank of England do?

I'm guessing that they will have to increase the base rate of interest over time to fight these inflationary pressures, even though this will have very little effect?

In which case should one get a long-term fixed rate mortgage ? (Cheshire offer a 20 year fixed rate at 4.99%).
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Last edited by Ballard on Wed Aug 03, 2005 3:36 pm; edited 1 time in total
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Blue Peter



Joined: 24 Nov 2005
Posts: 1939
Location: Milton Keynes

PostPosted: Mon Jul 25, 2005 1:54 pm    Post subject: Reply with quote

Ballard wrote:
I'm also trying to work out what the long term trends will be. If we are entering a long-term period of inflation driven by increasing fuel prices then what will the Bank of England do?

I'm guessing that they will have to increase the base rate of interest over time to fight these inflationary pressures, even though this will have very little effect?

In which case should one get a long-term fixed rate mortgage ? (Cheshire offer a 20 fixed rate at 4.99%).


Possibly, though you still have to find the money to pay the mortgage. As long as you're in employment, that may not be a problem, but if you're not... The general advice, e.g. Clive Smith, is to reduce your debts, which would seem to protect you either way,


Peter.
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snow hope



Joined: 24 Nov 2005
Posts: 4101
Location: outside Belfast, N Ireland

PostPosted: Wed Aug 03, 2005 11:49 am    Post subject: Reply with quote

It is all well and good saying reduce your debts. But that is a lot more easily said than done! Especially regarding mortgages.....

In the event that you can't find the odd ?100k to pay off the average mortgage, then I would certainly think that switching to a fixed rate is an excellent thing to do. Fixed rates for any other borrowings (if you can't pay them off right now) is also a very sensible precaution.

My own view is that interest rates may drop 0.5% over the next 3 months in the UK. Inflation will trend upwards from now on. As the SHTF over the coming year or three, I expect inflation to rise dramatically. This will of course cause interest rates to follow suit and I think we will see double figures for both in the not to distant future (I am old enough to remember when this happened before in the UK - even without PO!)

Regarding deflation and depression, I suspect strongly both will occur, but I don't have enough understanding of the situation to put a time scale on it. In fact we will enter a period in history which we have never seen before and thus it will be extremely hard to predict what happens economically.

The old rules of raising interest rates to curb inflation will break down in my opinion. As many people lose their jobs and business' go under and Social Security gets withdrawn and houses get reposessed and banks fall then we really are into a situation that is quite chaotic. I will be very surprised and pleased if this kind of disruption doesn't come about over the next few short years.

Maybe by studying what happened in Argentina we could get an idea of how it will pan out? Anyone have knowledge of that as I don't?
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