How high will inflation go ?

[Justin Smith]

As an economist in a previous life, some good points and some, shall we say, more political than science based but what is undeniable is that inflation is nowhere near 4%.
Where's the big costs ? wages, raw materials, power ?
Minimum wages went up 6.2% this year and will go up 6.6% next year. Even for staff over those minimums, they want raises too.
Our card and paper suppliers have raised prices 9 times this year and we are now paying over double previous costs. We also have to order on huge lead times and accept any price increases in the interim.
Gas prices are up to 6 times the previous and we were offered new contracts at 15 times the lowest cost we are currently paying. Yes, 15 times ! Electricity is up 300% in 5 years.
Fuel is past 150p per litre. It is up over 20% in 6 months.
4% inflation ? Bollox.

I would only add that the minimum wage, at £8.91 (and due to go up substantially, again, next year) is no longer peanuts. My first job was as, supposedly, a toll hire shop assistant manager in 1985. The wages were £5,500 a year*, adjusted for inflation that'd be about £7.50 an hour now......

* TBF I think that was plus bonus but the bonus was only about £100 a month and it wasn't, by any means, guaranteed....

 

[The Byre]

i play rugby with a radiographer

Now I can't get the image of a small radiographer being thrown around the field by a team of great big hairy men.

Throw-ins and scrums and even passes, yes, but I bet those conversions hurt the poor little fella!

 

[Talay]

It is time to tax assets I'm afraid. If your £1m house suddenly cost you £20k a year in tax then the price of your property would almost certainly fall because we are locked into a dream world where people cannot afford property from earnings and the young have zero chance of buying anywhere unless with help from relatives.

We cannot have 4th generation property owners passing their 3rd generation children and even the 2nd generation grandchildren to fuel the house purchasing desires of 4th generation great grandchildren. Something has to take the heat out of property values cascading down the generations.

 

[Talay]

I would only add that the minimum wage, at £8.91 (and due to go up substantially, again, next year) is no longer peanuts. My first job was as, supposedly, a toll hire shop assistant manager in 1985. The wages were £5,500 a year*, adjusted for inflation that'd be about £7.50 an hour now......

* TBF I think that was plus bonus but the bonus was only about £100 a month and it wasn't, by any means, guaranteed....

I agree with you.

With £9.50 coming in 2022, an average 40 hours working week is now just under £20k and that means for every job, including those jobs that are not worth £20k.

Sadly, it means that for a job that is worth £10k we now have to pay £20k and that extra £10k wasted means that it is not available to pay 2 other people £20k and thus they are tied to the £20k NMW.

If the minimum wage continues to rise, say to £15 an hour as has been put forward, then that would be £31k a year and I'm sorry but 50% of the country would then be on the NMW.

Or should we say that they would be on universal income, because the path we are going down looks remarkably like one whose end result is universal income in one form or another.

 

[IanSuth]

I noticed a disturbing bit of news this am as well, Kensington mortgages have launched a 40 yr mortgage, that is just another way to get more £ into the property market and if it were to become commonplace would just cause more house price inflation.

As I have said I believe house price supply&demand is based on supply of capital above all else

 

[thetiger2015]

I agree with you.

With £9.50 coming in 2022, an average 40 hours working week is now just under £20k and that means for every job, including those jobs that are not worth £20k.

Rising prices are good for the government, especially when they can just point at private companies and say 'its your fault, you're not paying enough'. Minimum wages go up, cost of living goes up too, government introduces more taxes / green taxes / increased council tax, to bring people back down to below minimum wage, then we start all over again. Milking private companies through their employees. The employee doesn't get the benefit of that extra few pence per hour, it's already taxed off them.

 

[gpietersz]

As I have said I believe house price supply&demand is based on supply of capital above all else

Definitely so. There was a bank of England study (last year, I think) that showed interest rates were the main determinant of house prices (it might ahve been as an income multiple - cannot find the link). That probably reflects people paying based on what they can afford as as a monthly payment.

A 40 year mortgage will make affordability even more sensitive to interest rates.

 

[The Byre]

interest rates were the main determinant of house prices

Yep. 1% change in interest rates ---> 7% change in house prices.

Example -

£300k house, 10% deposit so £270k borrowed.
@ 3% that's £1,500 pcm with insurance.
@ 8% that's £2,400 pcm with insurance.
.'. @ 8% £1,500 buys a £190k house (36% less).

 

[gpietersz]

It is time to tax assets I'm afraid. If your £1m house suddenly cost you £20k a year in tax then the price of your property would almost certainly fall because we are locked into a dream world where people cannot afford property from earnings and the young have zero chance of buying anywhere unless with help from relatives.

We cannot have 4th generation property owners passing their 3rd generation children and even the 2nd generation grandchildren to fuel the house purchasing desires of 4th generation great grandchildren. Something has to take the heat out of property values cascading down the generations.

I agree. Its also easy to tax property - you cannot move it offshore.

I think it would be fair to have a lower rate or some sort of cap (maybe as a percentage of income) for main residences.

 

[Alan]

Something has to take the heat out of property values cascading down the generations.

Taxation often doesn't have the desired effect.

The obvious solution is build more houses.

 

[Alan]

I agree. Its also easy to tax property - you cannot move it offshore.

But you can sell it to an offshore company and then rent it back.

 

[Financial-Modeller]

But you can sell it to an offshore company and then rent it back.

Which is one reason that purchasers of higher-value properties are using SPVs to own them. The SPV retains flexibility/portability etc in anticipation of changes to the tax landscape.

 

[Deleted member 59730]

Its also easy to tax property - you cannot move it offshore.

Wanna bet?

Private Eye publish a list of properties owned by foreign offshore property entities.

 

[gpietersz]

But you can sell it to an offshore company and then rent it back.

Private Eye publish a list of properties owned by foreign offshore property entities.

That will do you not work if its a tax on the value of the property as @Talay suggests. The tax will be due regardless of where it is owed and it is much easier to enforce than tax on income from the property or capital gains tax when it is sold.

Letting agents or (residential) tenants are supposed to deduct 20% tax from payments to an offshore landlord. I do not know about commercial properties.

 

[Alan]

I already pay a local tax on property. So you are suggesting a further tax on property withe the objective of what? Depleting my pension savings, or forcing me to move into a smaller house, or borrow money on equity release to pay the tax?

I really don't get what it achieves, apart from making it less desirable to live in the UK forcing the more wealthy to take their wealth offshore, houses can't move but people can.

It is not just the wealth movement but also 'human capital flight' as those that will become wealth creators in the future realise that there is no future for them in the UK.

Dabbling with taxes rarely solves problems. You have to go all in. Confiscate all privately owned property and share it out evenly to all, also make sure that citizens can not leave the country.

 

[gpietersz]

I already pay a local tax on property. So you are suggesting a further tax on property withe the objective of what?

If you mean council tax, it woudl replace it.

I really don't get what it achieves, apart from making it less desirable to live in the UK forcing the more wealthy to take their wealth offshore, houses can't move but people can.

It does not give them any incentive to move other wealth, and they cannot move houses.

This is an argument against any tax increase, and favouring regressive taxes.

It is not just the wealth movement but also 'human capital flight' as those that will become wealth creators in the future realise that there is no future for them in the UK.

I think the extent and impact of that are greatly exaggerated. What sort of people are you thinking of as "wealth creators".

 

[Justin Smith]

>>I read it was because chip manufacturers are still trying to get back the production they lost due to shut downs. Is that wrong ?<<

No. They are focusing on chips for computers, servers, networks and other devices first. Car manufacturers only ever buy in small quantities so the profit margins are much smaller than a PC company buying millions of chips.

Some high up bod (I didn't get his name) from Dyson was on R4 this morning and he put the root cause of the chip shortage firmly down to the pandemic, which is what logic would tell one anyway. Technically he was right and wrong. It was not the virus that caused the problem, it was - most of - the world's reaction to Covid (trying to suppress society and the economy to try and suppress the virus) which caused the problem.

 

[fisicx]

...it was - most of - the world's reaction to Covid (trying to suppress society and the economy to try and suppress the virus) which caused the problem.

Only partly so. There is still a massive supply problem. Many of the raw materials are in short supply (and will continue to be so) and the manufacturers aren't interested in low quantity runs. If you need millions of chips for a phone it's all good. If you want 50,000 for your hoover then you go to the bottom of the pile. This has nothing to do with the pandemic, it's all about the money.

 

[Deleted member 59730]

and they cannot move houses.

I have met dozens of people who sold up in the UK and bought in France and Spain. If that is not moving houses what is?

 

[Deleted member 59730]

Dabbling with taxes rarely solves problems. You have to go all in. Confiscate all privately owned property and share it out evenly to all, also make sure that citizens can not leave the country.

Which is what the Netherlands did after WW2. It made a very fair society for a few decades until the rot set in again.

 

[DontAsk]

the root cause of the chip shortage firmly down to the pandemic, which is what logic would tell one anyway. Technically he was right and wrong. It was not the virus that caused the problem, it was - most of - the world's reaction to Covid (trying to suppress society and the economy to try and suppress the virus) which caused the problem.

It was both the pandemic and the reaction to it. Auto makers shutdown and turned off the demand so chip suppliers switched to PC silicon to feed the demand for devices for homeworking. That took time and it tales time to switch back. Add in staff shortages due to illness, the fire at the Renesas fab, and stockpiling and we end up where we are. I spent quite a bit on silicon to see me through, free-issuing it to the assembly house when they can no longer get stuff. I bet others have spent a lot more and stockpiled a lot more.

 

[IanSuth]

I have met dozens of people who sold up in the UK and bought in France and Spain. If that is not moving houses what is?

No that is moving capital out of the UK

Their original house is still here and owned by someone (or more likely a financial institution until the mortgage is paid)

If i was in the treasury I would be doing a radical overhaul - i would create a single income tax rate that covered earned income, unearned, capital gains, corporation and inheritance. Once i had that harmonised I would look at a simplified set of allowances so transfer of a primary residence to a descendant would for example have an allowance (so small properties could be transferred tax free but not larger ones or those in the SE) and certain preferred corporate investments would be allowed to be offset against corporation tax (such as R&D or job creation)

But in general a simplification/harmonization of headline tax rates would remove a lot of the reason to create special vehicles or transfer sums around. When we got to the point people working in warehouses are being pushed to work through PSC's/Umbrellas for tax/expense/take home pay reasons it is obvious the system has become too convoluted

 

[gpietersz]

I have met dozens of people who sold up in the UK and bought in France and Spain. If that is not moving houses what is?

I thought in the context I did not mean move house in the usual sense, but the literal one of moving a house. They did not take their house (and, more importantly, land) and transport it to France or Spain. The usual usage is only possible because of the near impossiblity of moving a house.

The house might change ownership, but all that means is the new owner pays the tax instead. The asset itself remains taxable.

 

[Deleted member 59730]

I thought in the context I did not mean move house in the usual sense, but the literal one of moving a house.

But you are missing the bit about the people living in the house in other places. They are taking their talent with them. In the long run the UK will be losing potential to pay tax while the US, AUS and EU will be gaining it.

We don't need low wage inflation to make something unviable. Other things like changing exchange rates make it unviable too. If we had entered the Euro zone when Gordon Brown had a chance we in the UK would all be nearly 80% better off.

 

[gpietersz]

But you are missing the bit about the people living in the house in other places. They are taking their talent with them.

That is a different issue.

What evidence do you have that their talents are 1) more valuable the talents of immigrants who replace them (given net migration is in) and 2) greater than their costs to the economy.

A fair proportion of British people abroad are FILTH (Failed in London Try Hong Kong) and the like. Most of those of working age I know come back.

If we had entered the Euro zone when Gordon Brown had a chance we in the UK would all be nearly 80% better off.

What makes you think that?

Definitely not. The Euro has been a failure, because it was not followed by the level of political integration envisaged.

 

[Deleted member 59730]

A fair proportion of British people abroad are FILTH (Failed in London Try Hong Kong) and the like. Most of those of working age I know come back.

You know a different set of people to me. I know of talented people working in many fields who have no intention of coming back. Their children are taking out French and other EU citizenship and have no intention of coming back to the UK. I personally know many highly talented people who went to Australia and stayed there. Three of my friends have received honours from the Aussie government.

None of the HGV drivers and other immigrant workers will benefit the UK as much as the talent which is leaving.

 

[gpietersz]

You know a different set of people to me. I know of talented people working in many fields who have no intention of coming back.

OK, so prove the overall effect. Any stats?

"People you know" is not a statistically meaningful sample.

None of the HGV drivers and other immigrant workers will benefit the UK as much as the talent which is leaving.

Again do you have any evidence of this, or are you just drawing on stereotypes?

Blue collar workers can contribute a great deal to the economy. If we could get some immigrant HGV drivers right now (sort of tricky given a shortage in multiple other European countries) the benefit would be huge.

If we are going by "people I know", the immigrants I know are mostly skilled professionals.

Even better, a lot of them go back to their countries of origin in retirement, so we get their tax while they are working but do not have to pay medical costs when they are elderly.

 

[Justin Smith]

Only partly so. There is still a massive supply problem. Many of the raw materials are in short supply (and will continue to be so) and the manufacturers aren't interested in low quantity runs. If you need millions of chips for a phone it's all good. If you want 50,000 for your hoover then you go to the bottom of the pile. This has nothing to do with the pandemic, it's all about the money.

So you're saying Dyson, as well as me, and logic, are wrong that the supply chain problems biggest cause is the shut down and slow down in the world's economise for months on end ? ?
Incidentally, it's still going on. We went to Creswell Craggs at the weekend, we were unable to go on the tour round the caves "because of Covid, we are only allowing 6 people on each tour instead of the usual 24". That, and I daresay thousands of other examples, are costing teh economy shed loads of money.

 

[The Byre]

Any stats?

HGV drivers - 14,000 of EU citizenship left.

According to the ONS, some 200,000 EU workers left the UK, reducing the number of EU citizens with jobs in the UK from 3.7m to 3.5m. Hardly a stampede for the exit!

 

[Justin Smith]

Blue collar workers can contribute a great deal to the economy. If we could get some immigrant HGV drivers right now (sort of tricky given a shortage in multiple other European countries) the benefit would be huge.

Of interest, apparently 40,000 HGV tests were cancelled over the pandemic.
The pass rate is 56%, so that could have meant about an extra twenty two thousand HGV drivers, significantly more than the 14,000 EU drivers who left.
Yet again, damage to the economy and inflationary pressures, caused by the suppression policies of the government.

 

[NickGrogan]

So you're saying Dyson, as well as me, and logic, are wrong that the supply chain problems biggest cause is the shut down and slow down in the world's economise for months on end ? ?
Incidentally, it's still going on. We went to Creswell Craggs at the weekend, we were unable to go on the tour round the caves "because of Covid, we are only allowing 6 people on each tour instead of the usual 24". That, and I daresay thousands of other examples, are costing teh economy shed loads of money.

Covid is one of many reasons, it's not the only or the main one.

Where are the chips made? Not in the UK. How long did Asia lockdown for? Not long, and not at all in some places.

How is people not going to Creswell Craggs hurting the economy? It's hurting Creswell Craggs, whatever that is. But the money will just be spent elsewhere.

 

[gpietersz]

Covid is one of many reasons, it's not the only or the main one.

Then what is the main reason?

China still has regional lockdowns when there are cases and severely restricts travel. Vietnam had a strict lockdown until at least Septermber. Malaysia had lockdowns earlier this year and still has a lot of restrictions.

 

[IanSuth]

Then what is the main reason?

China still has regional lockdowns when there are cases and severely restricts travel. Vietnam had a strict lockdown until at least Septermber. Malaysia had lockdowns earlier this year and still has a lot of restrictions.

The main reason is that modern supply chains had become hugely integrated and JIT, that meant they were not very resilient.

Pandemic/Brexit/even swifter than expected pivot towards EV's are all triggers, the underlying issue is lack of resilience in supply chains meaning they might have survived a single shock in multiple places or multiple in single places but not multiple in multiple and that set off a cascade through the entire world economy.

We will I think have to wait a few years for it all to settle down and we can see where the bits have landed

 

[gpietersz]

The main reason is that modern supply chains had become hugely integrated and JIT, that meant they were not very resilient.

I agree, the fragility of supply chains is the underlying cause.

It was entirely foreseeable but short sighted governments and businesses just ignored it.

We were going to have supply chain issues at some point, but I think its clear that the pandemic is the major proximate cause. Another important one are gas and electricity prices and shortages.

 

[NickGrogan]

Then what is the main reason?

China still has regional lockdowns when there are cases and severely restricts travel. Vietnam had a strict lockdown until at least Septermber. Malaysia had lockdowns earlier this year and still has a lot of restrictions.

Taiwan is the major semiconductor producing nation, and they're more affected by drought than Covid.

Renesas Electronics supplied about 30% of the car market for chips. The factory fire there would have hit car production in any year.

As @IanSuth has said, we don't have resilient supply lines. No one wants to hold any stock of anything and then gets upset when it causes problems.

Lack of gas storage is one of the reasons that we are getting higher gas prices than Europe.

 

[DontAsk]

Taiwan is the major semiconductor producing nation, and they're more affected by drought than Covid.

Packaging is often done elsewhere, not co-located with the fab, and there is a shortage of lead frames and other packaging materials.

 

[Justin Smith]

Covid is one of many reasons, it's not the only or the main one.
Where are the chips made? Not in the UK. How long did Asia lockdown for? Not long, and not at all in some places.

It's not as simple as that. Most chips might be made in SE Asia (who for many reasons, including their previous exposure to SARS, had a relatively "easy" pandemic) but they export most of them (either directly or as part of other products) to out side that area.
Companies have to decide on investment decisions and production plans etc. It might seem hard to believe now, but back in March 2020 the world looked a very pessimistic place and so most businesses were planning to, and did, ramp down production.

 

[NickGrogan]

It's not as simple as that. Most chips might be made in SE Asia (who for many reasons, including their previous exposure to SARS, had a relatively "easy" pandemic) but they export most of them (either directly or as part of other products) to out side that area.
Companies have to decide on investment decisions and production plans etc. It might seem hard to believe now, but back in March 2020 the world looked a very pessimistic place and so most businesses were planning to, and did, ramp down production.

If the chips don't get made, they don't get exported. Whatever could've or should've happened after that is irrelevant.

 

[Deleted member 59730]

I always make my own chips to go with my fish.

 

[Paul Carmen]

It's fairly clear that it's not just Covid driving inflation. Brexit has added cost, QE and low interest rates has made money super cheap, attempting to migrate away from fossil fuels and adding demand for chips, precious metals and rare earth elements without having the renewables and infrastructures in place to support the pace of that change has exacerbated it.

When you throw in the pandemic shut downs on top of the 'just in time' world supply chain you have a big problem. Who in their right mind wouldn't raise prices when demand significantly out strips supply.

A combination of QE money supporting the pandemic, and driving the recovery, means that government/national debt levels are so high that raising interest rates significantly is out of the question, as the debts become unserviceable. So what happens?

I can't see much happening, there's little that can be done without dramatic global changes. Do you see that happening?

Do you see the Tory government reacting dramatically and decisively? What was in Sunak's budget, no mention of inflation/debt or global warming, basically some smallish tax increases. What did we get out of COP 26? A watered down can kicking effort again. What's the US doing? Effectively QE still and looking at protectionism via a massive infrastructure bill.

No one really wants high inflation, but neither do they want a global recession, or to rock the boat. I don't see people protesting on the streets in most western countries, they'd rather have a cushy consumerism driven lifestyle.

High is the inflation level answer, with a gradual reduction in inflation over a few years being likely, with the real value of money reducing significantly over that time. Whether that holds true longer term if governments don't react to the the debt bubbles or global warming is anyone's guess...