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back to article Lies, damned lies and inflation statistics

As inflation tumbled to a mind-numbing zero per cent earlier this week, the question on many people’s lips is: why is everything still getting more expensive? The simple answer lies in the tired old joke about the statistician "who drowned in a pond that was only 1-inch deep – on average". The Retail Price Index, or more to the …

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Lazy sunday morning...

I tried downloading the zip , unpacking and attempting to use calculator (index.html?)

Nothing - didn't work: no instructions etc., finally gave up.

Returned to website and attempted to use online version: 'connection refused'.

Re-tried various links for instructions or workable connection - all failed.

This was approx 10:30 am sunday 29th march (server busy?)

OK: a lesson to me. Serves me right for being such a sad act as to

try and use a .gov IT product when, in reality, I did have a life.

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Paris Hilton

CPI = Consumer Price Index?

Inflation is essentially a stealth tax that is practically unavoidable. Low interest rates and a CPI that is still way over target is simply drawing attention to something that's never been quite so obvious before - it's practically impossible to identify a fiat money system which wasn't eventually debased by the powers that be. Inflation indexes only try to hide the level of debasement.

And my personal inflation?

For years it was looking frankly horrendous as house prices spiralled to dizzy heights - making my house buying pound worth less and less each month. Fortunately I consoled myself that while my income had more than quadrupled and average house prices had gone up 7X my income - I'm paying less rent now than I was in 2000 (and I'm now renting a house rather than a room). House price inflation is certainly reversing now - and it may be worth buying at some point.

Other essentials like discounted supermarket food, rice, bread, nuts, pulses, fruit and veg are certainly climbing steeply - can a tin of tomatoes really cost nearly a quid? It does in my local (it was under 20p a couple of years ago).

No real sign of deflation in council tax bill either. Up 3%. Utilities are remaining fairly static/going down as I replace old appliances with more energy efficient ones, dumped the fridge in favour of a cold larder and wear more jumpers rather than turn the heating on. My power company won't get rich on a netbook with mobile broadband and an energy efficient light bulb.

My clothing bill is also unlikely to keep Phillip Green happy - I've only bought socks (3 pairs/quid in my local pound shop) in the last year.

I now stay behind the bleeding edge gadgetwise and save cash. The netbook I'm typing this on dropped £70 in six months.

The other pleasures in life are also getting cheaper. My local cash converters recently served up - 4 recent and decent films on DVD for a total of £1.99. Secondhand books are around a penny on Amazon (still free in local library) and the missus no longer expects lavish gestures on Valentines day.

Paris - because I reckon her sense of self worth is highly inflated.

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Unhappy

....and another thing

...and another thing that deserves discussion is the effect of 'Economic Easement', aka printing money. This is effectively devaluing sterling and will continue to do so.

As the UK now makes bugger all and oil prices are measured in dollars, the cost of almost everything except locally grown food is set to increase in direct proportion to the speed that Brown runs the money factory and devalues the currency.

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Boffin

RPI vs CPI

One of the key things about CPI is that it excludes mortgage repayments.

As mortgage debt dwarfs our other sources of debt, and stands at around £1.8 trillion, it strikes me as a staggeringly bad idea to use CPI as a measure of inflation. We had only half an measure against inflation. Why?

- Because under CPI, British house prices quite happily mushroomed without directly affecting official inflation figures.

- Because had the UK Labour government ignored Lamont's RPIX, jettisoned CPI and switched back to RPI upon their election in 1997, inflation rises would have come swifter and sooner. This would have forced an early rise in interest rates -- thus stopping the unsustainable UK house price boom in its tracks.

Gordon Brown, that one-minded skittish git, was most likely aware of the problem but swept it under the carpet; he chose the banks, not us.

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Anonymous Coward

Growth in the money supply

It's the growth in the money supply. People demand more than can be afforded, and the fix is to let the money supply grow, so they get more money (as they wanted) but it buys less goods (which they don't notice). They can *think* they are making a better life for themselves, as everyone tries, but it's an unobtainable goal that's always *just* out of reach.

Keep working harder the goal is just there in front of you...... too far in front and they give up, too near and they reach it and give up.

Price indexes are junk, read up on 'Hedonics tricks'.

Hyperinflation events are nothing to do with inflation (I disagree with Mish's comments that "none of what's happening is inflationary certainly not hyperinflationary"). Hyperinflation events are loss in faith of currency (IMHO), but people simply trade in other currencies, things don't lose or gain value, just a currency becomes the worthless paper that it is. Happens often, even happened to the US before.

http://en.wikipedia.org/wiki/Continental_dollar

If Geithner and Bernanke get their way, they put the US taxpayer on the hook for the banks bad investments ($10 trillion, $12 trillion?) i.e. the leverage number they choose times the $1 trillion bailout. Geithner chooses a leverage number, and the Fed effectively lends that to the treasury at that leverage number (i.e. buy this asset for only $1 down and infinity easy payments....).

Nobody in Congress authorised $12 trillion in bailout did they?.... I didn't think so!

The bid is a sham, it is designed to create an inflated price for the asset by removing the risk. Giethner is a liar when he says it protects the tax payer, it is a "mock auction" intended to make the tax payer overpay for the toxic asset to give it a fake high valuation.

http://en.wikipedia.org/wiki/Mock_auction

Now here's the thing, why would hold their assets in US$? If they know that $12 trillion is toxic crap they offloaded, they would move out of $ and let the suckers hold $ related assets and take the inevitable deflation.

The banks get money for their bad choices, the investors in the banks, the bond holder etc. all get money, they trade that out of $, those assets continue to fail, the $ collapses further, and lower, they come back into the $ after the deflation.

It's not like a country with negative trade balance can ever afford the lifestyle it's been living these last 8 years, so those toxic assets are valued correctly as junk by the market.

Obama needs to reign Bernanke and Geithner in. A mock auction and a lot of PR lies will fool no-one.

All of the above is IMHO.

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Stop

Real inflation

Let's not confuse people any more than they already are. Rising prices, and all the statistics that surround it, are an effect of inflation, not inflation itself. Inflation is the increase in the supply of money, and all the effects follow on from this. Central banks/governments control the amount of money in an economy, as well as the price of money, ie. interest rates.

So when the money supply is inflated by the central bank/government, the value of the currency declines (this is due to scarcity, which determines the value of something based on how common it is). When the value of the currency declines, prices adjust to the new reality, hence "rising prices". Of course, the prices haven't actually risen, they have just been adjusted because the currency is worth less than it was before, and in order to prevent loss prices must adjust.

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Statistics.co.uk down as of Sunday....

Statistics.co.uk down as of Sunday.... Maybe the government has censored the tool, so we don't get angry with them...

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Flame

Corrupted numbers!

Most of the statistics are garbage, the lists manipulated by the Government by the inclusion of items that are of limted appeal or may be a "one off" purchase like Blu ray DVD players (and /or their associated discs.)

REAL inflation - the stuff that matters - is the cost of essentials, Food, Heat, Light, Water, Clothing, Travel and communications. The things that no household can avoid. forget the frivolities, lack of a Blu ray device never killed anyone did it? The current method is responsible for ensuring that vulnerable groups like pensioners are defrauded of a real cost of living increase by the fanciful benchamrk that those in well paid governmental jobs come up with.

Bread seems to have gone up again this month, 0%? Only in your dreams - or the corrupted Government statistics, shouldnt expect anything different from politicians, who are so far out of touch with the real world that I dont believe they are actually fit to govern us any more.

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Read. And Understand

"What You Should Know About Inflation" by Henry Hazlitt

http://mises.org/story/2914

http://mises.org/multimedia/mp3/audioarticles/2914_Hazlitt.mp3

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Black Helicopters

Politicians

An expressed desire to seek political office should be sufficient grounds for disqualification from doing so.

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just

get used to being lied to.

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Jobs Horns

Electricals

Before Christmas I could buy a Canon 450D with kit lens from Cameraworld for £370. It was £420 in the shop and came with a £50 cashback offer.

Today it's £550 with no cashback, an increase of £180 or almost 50%. And monkey nuts went up 20p per bag in the supermarket too.

So surely common sense tells you that in the wake of the pound's collapse and a forthcoming recession scaring retailers into defensive postures, anyone claiming inflation is 0% is a fool.

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Dan

@ AC 29th March 2009 11:52 GMT

I love the way you made up actual numbers that are an order of magnitude different from the easy to find real numbers. Even given the US/UK million/billion/trillion mismatch, you're quite a hoot.

Actual total estimate of bailout costs: ~$1 trillion US. That's $1*10^12.

Your assertion: $12 trillion,

Error factor: 11

Typical acceptable error factors: 0-3

(Yes, the fact that I just needed engineering notation to make the numbers clear is itself an indictment)

However you put it, the money lost to bad loans has ALREADY left the economy. (It is debatable if the value of the real property never got as high as the price, or if the value rose and then sharply fell. Either way, value was expended and removed.) Now, the US has a similar total total domestic value to what it had about 10 years ago, and ~7% LESS money.

If you think having 7% less money isn't a big issue, then I ask: is 7% ADDITIONAL unemployment a big issue? Would a 7% pay cut be a big issue? How badly would across-the-board deflation of 7% hit a small business, given that their loans are fixed rate, and the inventory they have has a fixed dollar cost? (Prices CAN'T go down right away; a 7% drop in retail price means a ~14% drop in unit profit before fixed expenses (at x2 markup, typical for a small retailer). If fixed expenses (~50% of total expenses) also go down by 7%, then your typical small retailer has their bottom line drop by about 11.5% of their revenue. If their total margins were that high to begin with, they wouldn't be a small business for long.

Numbers example:

Wholesale unit cost: $10

Retail unit price: $20

Fixed expenses (lease, payroll, loan payments, etc): $6000/month

Sales: 700/month.

sales X marginal profit = $7000/month, - fixed expenses = $1000/month for the owner to live on.

Drop the price by 7%, to $18.60/ unit. Now you have $6,020/month from sales, -$6000/month expenses, the owner gets $20 a month.

In an ideal economy, the wholesale price would rapidly drop, as would the fixed expenses, however nobody can afford to drop their prices first: The wholesaler has a similar problem, shift raw materials for wholesale price and wholesale price for retail price, and the labor can't get less expensive before everyone's goods get less expensive.

The voting public would never go for government-run corporations, so the only way to control the economy is to keep the available money equal to the available value.

Put differently, if the money supply is kept constant, as by a gold standard or similar gimmick, then eventually a few tycoons will have -all- the money, and nobody else will have any. (If one consistently earns more than one spends, one's money will always go up. Eventually, it must reach the point where there is no money one doesn't have. Therefore, it is impossible for one to spend less than all the money one makes. Since long-term saving is IMPOSSIBLE, investments or large business loans don't happen, and the economy stalls from the top.

Fiat currency, released in the form of deficit spending, allows the money supply to remain equal to the total value of goods and services provided. The current issue is that the supply is poorly controlled. Also note that in cases of massive reduction of value -without- an associated reduction in money would require that money be removed- I.E. taxed from the public and NOT spent, ever. This could occur if a trillion dollars of -uninsured- consumer goods were to catch fire and be burned, bankrupting the owner(s) and the owner(s) lender(s) but the money that would have bought those goods is still in the market. (If they were insured, then the insurance company loses money roughly equal to the lost value. If the owner(s) can withstand the loss, they have lost the money. If the lender(s) withstand the loss, then they provide the money. However, if the lender(s) cannot float the damage, then EVERYONE pays. A total of a trillion dollars needs to be thrown away. (How about we (on paper) give it to the banks, allowing the previous economy to resume, and mandate additional fire protections?)

Wait, that's what the issue is about?

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Unlikely story

Bread - 25% dearer over the last year

Milk - 25% dearer over the last year

Cooking oil - 25% dearer over the last year

Catfood - 25% dearer over the last year

Wine - 25% dearer over the last year

Inflation zero ? Pull the other one.

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worse figures used in US

for many years now .. the inflation rate published here excludes fuel and food costs, and has been only a measure of *durable* manufactured item prices

they've only pulled out CPI recently when fuel costs went down

inflation is expansion of money supply beyond gain in per capita productivity

so .. real property inflated in price due to expansion of money supply, in the form of easy credit, directed at that particular product .. and when that credit bubble burst, so did the inflated prices

one way to show this .. is to follow the mild rise in US housing prices from about 1982 to 1994 or so, that basicly followed rise in income/productivity .. extend that line to the present .. and that's about where housing prices are now .. what was a *peak* price of $300,000 .. is now about $175,000 ...

same with stock market .. follow the line from early 80's to early 90's .. extend it out .. and you're at about 7000 DJIA .. massive leveraging *created* excess money supply for stock products, inflating their price

when the big players took the money out of banking / housing and put it into oil and other commodities, there was excess money chasing too few product, and oil went to $147 and bushels of corn to $6

this does not happen in a free market with regulation to prevent artificial manipulation of product or money supply

unfortunately , it was the US Congress that artificially manipulated the housing market in an attempt to make housing affordable to those that could not afford it, and forcing banks to make risky loans in the process .. very quickly prices inflated .. making housing unaffordable

and worse now .. the Central banks and governments are artificially expanding money supply to prevent assets from finding their real market value ..

the only result can be higher inflation

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Unhappy

Should track cost of essentials.

Agree with Cris ("Corrupted numbers!" at 29-MAR-2009 14:26 GMT): inclusion of unnecessary one- off things (cars, teevees, computers) does not give a true picture of what most folks are dealing with. Given the hemorrhaging of jobs here in 'Murka, I doubt many folks will be buying much more than food, rent, clothing, and petrol/ bus passes/ bicycle maintenance/ other commuter expenses, so the inclusion of "won- the- lottery purchases" seems misleading. However, since too much of our economy seems to rely on people buying unneeded plastic crap (frequently and in bulk), that might be why these figures are included. *shudder*

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Just so...

Cris Page, just so. It's real easy to make it appear inflation is 0, when you throw Blu Ray players and crap in the mix. So, the player drops $200 for instance (since they started out so high just in the last year or two) -- food costs go up $200 (because there's actually tons of inflation), and the gov't claims the change in costs was $0 and 0 inflation. Yeah that's just fabulous.

Thumbs down for putting new technologies in the mix, throwing the stats off.

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Happy

Don't forget...

...that the inflation figure is a historical average over the past year.

In the past year interest rates have plummeted. That's why the RPI, which includes mortgage interest, can be zero for the past year even though the price of everything else is still going up.

However, interest rates are unlikely to fall much further, if at all. So it doesn't take a genius to see that going forward price changes are going to be upwards on average, even if you include mortgages. RPI is also going to head straight back up once the interest rate cuts work their way through the 1-year delay.

Worse, once we're through the downturn, interest rates will have to go back up. That'll put new upward pressure on the RPI.

So enjoy your zero percent inflation while you can. It's not real and it won't last.

And while I'm on the subject, does anyone know why the CPI uses a geometric mean? After all, when I go to the checkout, the supermarket doesn't take the geometric mean of the prices to calculate my bill. Otherwise I could save a fortune by always buying a packet of chews with every big-ticket item. And as far as I'm aware, my bank uses normal addition and subtraction (more of the latter, unfortunately) to calculate my balance.

So isn't the CPI really just a fiddle to allow a few prices to rise much faster than average without it looking so bad in the figures? In that case, the CPI getting out of control is really worrying.

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YBF index

Something I noticed last night.

In 1990 a video shown on You've Been Framed earned 250 quid, in 2009 it's 250 quid.

0% inflation for nearly 20 years.

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Good inflation and bad inflation

Don't forget inflation isn't all born equal.

House price inflation is always good. Stock price inflation is always good.

Wage inflation on the other hand is evil and must be stamped out.

Tax inflation... for some reason, goes unremarked.

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Joke

strange measures

It is worth pointing out that even though we are not average consumers, there is no way that everyone comes off worse than average. Fiddles like that give statistics a bad name.

You didn't mention the SDI, standardised desperation index: the deviation between CPI and gut feeling. Or Bayesean political factors, much used in the DDR, more recently in the USA, where the requester gets the answers he would like to believe.

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IT Angle

Inflation is news?

Must have been a slow news day... Nothing happened, so let's report something to get people more depressed. Is this nothing something? Let's have it analyzed by arguing economists, who can't even define what it is, let along varying degrees of good and bad.

Move along people, nothing (something?) to see here... move along...

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IT Angle

Is this 'The Reg' or the FT ??

the readers comments sound more like we are on the www.housepricecrash.co.uk forum...

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It's an index, not a percent

One of the things that confuses people is that although the RPI is an index (Retail Price Index, dead giveaway) it is usually quoted as a percent change over the year. This in itself is misleading. In fact, the RPI rose this month from an index of 210.4 to 211.4. Part of the reason the % rate is dropping is that this time last year oil prices were beginning to rise sharply.

In fact, your 'basket of goods' (the index) could remain static for the rest of the year and the % figure will go negative, since the RPI continued to rise throughout the year and hit a peak of 218.4 in September 2008

Oh .. and for those who say that their dog food has gone up by x% so the figures must be lying .. remember that your shopping basket isn't the only measure .. in fact, a big influence is probably housing costs, which *has* gone down.

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Anonymous Coward

@$12 trillion You missed the leverage

No, that number is correct, I'm guessing he chooses 12 as his leverage number, with $1 trillion, that puts taxpayer liable for the full 12 trillion while only putting up 1 trillion in capital. I *hope* 12 is the worst case scenario, but since treasury chooses the leverage ratio and since Geithner is a Wall Street man...

Also, no the money hasn't already gone, it's there in a fake valuation of assets on bank books, GOP wants to remove mark to market rule, so they can lie about the value legally. Geithners plan is to make it sort of look legit, then transfer the liability to the taxpayer, then, who knows.

What gets me, is this confirms to me that the bad assets are still overpriced and still on the books of banks.

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Unhappy

RPI vs CPI

Rpi measures inflation, cpi is gordon browns imaginary figure he invented to fuel a debt bubble whilst binging on excessive taxation and lying to himself that a 'bust' will never come

if the boe had been told to manage interest rates based on rpi rather than cpi then the country would be in a much better situation now

the root of just about all the uk's problems is gordon browns 10 years of chancellorship

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One thing you did get right...

You get a special prize for the correct spelling of rosé wine. The BBC kept blathering on about rose wine, which isn't the same thing at all.

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@Nick L

Old Cost of sofware equivalent to Windows + Office: 200 quid.

Cost now (Ubuntu + OO): zero

Average stuff like that in and it is easy enough to fiddle the numbers to anything you want them to be.

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re:Read. And Understand

"What you should know about politicians"

"What you should know about economists"

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Anonymous Coward

Government choices...

"the measure that government has chosen to highlight as an indicator of its success over the last decade - and which has been used to target bank interest rates - is CPI."

Of course if you're going to attempt to manage inflation with the only lever you use being the interest rate then you can't use a measure of inflation that includes the lever.

If RPI were high and you raised rates to force inflation down then inflation would go up because of the increase in borrowing costs. So, you see it's not really a choice.

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A pedant writes

"some of us are feeling poorer: none of us are average"

None of us IS average (none = not one). Unless you're in Lake Wobegon, of course, where everyone is above average...

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No taxes - except VAT

Note that no taxes are included in CPI or RPI - TV Licence was taken out a couple of years ago as it was now accounted for as a tax.

Yet this year the fall in RPI was partly accounted for by the 2.5% cut in VAT to 15%.

If we ignore that CPI must be significantly higher than it's headline rate!

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Stop

Hmm

I think the idea is, the Government game the system by carefully manipulating the "basket" of goods used to calculate inflation. (Blu-ray players, for instance, currently are on a downward price trend.) By including goods in the basket which will drop in price, the apparent level of inflation can be diminished.

(It's more or less the same situation with supermarkets. Having more items priced cheaper than your competitors *sounds* good; but if most of those items are ones that people are unlikely to buy in practice, it's just theatre.)

House prices are where the *real* inflation is at. My two-up, two-down terrace has quadrupled in value since I bought it in 1996; but I still couldn't find another place for less than I'd get if I sold it.

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This fails to answer the really important question

...Should I invest all my money in back-lacing corsets?

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Cant wait for the Public sector pay increments

You pay rise is at RPI (oh dear).

(if applicable)

Your student loan repayments go up by CPI.

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Housing Costs

Some housing costs have come down, but mortgages have not in all cases.

I had a 3 year tracker at base rate +0.44%.

It ends on Wednesday, and I'm now offered base rate +3.59%

Net effect is that my mortgage will carry on costing as near as dammit the same.

(BTW - this is because the building societies are being used to replenish the funds that bail out the banks as much as anything else - it is not the societies fault in all cases)

Oh, and bass guitars are up 25% since last summer when I started dreaming. Should have just gone for it and not discussed it with the wife first!

Steve

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@Steve King

'and bass guitars are up 25% since last summer when I started dreaming. Should have just gone for it and not discussed it with the wife first!'

so that's a 25% jump in the bass rate?

;)

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Anonymous Coward

The only real "index"

Should encompass the following:

-How much more / less disposable income do I have now over 1 year ago?

Anything else is just numbers being argued by those groups (financiers, politicians, economists) who are completely discredited wrt economic factors as they (1) caused the current problems, (2) saw the problems coming and chose to do nothing or (3) failed to see the current problems.

The same thing makes me shout at the TV* when a so called expert comes on and tells us the recession will last X months or will be the worst recession since year Y.

*Generally along the lines of "You fuckers didn't see this huge credit crunch and recession coming so how the fuck do you know when it's going to end you fucker?"

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Flame

Lies indeed

Many years ago, when I was in primary school, we had to do a class project on the cost of living. As part of this project,we had to note down what our parents were paying for various commodities, such as bread, milk, petrol, rent/mortgage, etc. In the project the teacher talked about inflation and how things become more expensive over time. Since I found this idea fascinating, I kept keeping track of the prices of various commodities and have continued this practice to this day. The result is that I now have a comprehensive record of the prices of several commodities for every year from 1976 - 2009; that's 33 years. I also tracked wages over the same time period (1976 - 1984 wages are Dad's wages, since I didn't start working until 1985). If this exercise has taught me anything at all, it's that our standard of living (related to how much we earn against how much we have to spend to live) has seriously deteriorated over that time. So, those older folks who reckon they did it tough? Have a look at this sample from my records (South Australian prices):

1976:

Dad's wage: $108.00 per week

Bread: $0.18/loaf: 0.17% of wage

Milk: $0.15/carton: 0.14% of wage

Petrol: $0.14/litre, $6.30 to fill tank: 5.8% of wage

Mortgage: $20.00/week: 18.52% of wage (House value $24,500)

2009:

My wage: $480.00 per week

Bread: $3.50/loaf: 0.73% of wage

Milk: $2.80/carton: 0.58% of wage

Petrol: $1.22/litre, $54.90 to fill tank: 11.4% of wage

Rent: $300.00/week: 62.5% of wage* (House value $410,000)

*(I actually live in a flat that costs $100/week, but I quote the rent my neighbour is paying for his house since my parents' mortgage in 1976 was on a house, so if I could live in a house like my parents', that's what I would be paying)

So, since 1976:

Wages have increased by 4.4 times

Bread has increased by 19.4 times

Milk has increased by 18.7 times

Petrol has increased by 8.7 times

Housing (Mortgage/Rent) has increased by 15 times (House value has increased 16.7 times)

Let's average these four common expenditures out: (19.4 + 18.7 + 8.7 + 15) / 4 = 15.45, so prices have increased by 15.45 times.

Wages have increased by 4.4 times.

Thus, my buying power today is: (4.4 / 15.45) * 100 = 28.48% of what it would have been in 1976.

That means I would have been nearly 4 TIMES BETTER OFF in 1976 than I am today, or would be if I could afford to live in a house.

That's just plain fucking disgusting. Don't talk to ME about low inflation, because it's a load of bloody bollocks!

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Boffin

Re: Government choices...

Close, but no cigar.

RPI measures mortgages -- the main cost of banks lending to you and I. The 'lever' is the interest rates that the Bank of England sets, not the rates the commercial banks set. But that does not matter.

If RPI had been used instead of CPI to set BoE's interest rates, rising inflation would cause - indirectly - rising interest rates (and so discourage lending); decreasing inflation would cause decreasing inflation (and so encourage lending). But you are grasping at a valid point here.

Back the 'lever' accusation - there /is/ a danger of oscillatory behaviour, due to the reciprocation between interest rates and inflation (through sympathetic feedback). This is a feature of many physical systems, and we can simulate this effect in the equations through use of relaxation methods -- creating a lag between spikes in inflation and their effect on interest rates.

Clearly, government policy is being decided by those who really don't understand numerical analysis.

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GB
Stop

@STEVE KING

"I had a 3 year tracker at base rate +0.44%. It ends on Wednesday, and I'm now offered base rate +3.59%"

On no account pay good money to get a tracker - get yourself a long-term fix (five-year plus, ten if you're sure of your circumstances) for under 5%.

Inflation will take off next year and anyone on a tracker will be taken up the jaxie when interest rates go up in tandem. Good deals will start disappearing in the summer.

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