Inflation and Interest Rates - I don't get it!

Mizu_Ger

Saw on the news this morning that inflation has increased slightly and one of the factors mentioned was higher interest rates. I thought that the purpose of increasing interest rates was to keep inflation under control. If this is so then why is it factored into the inflation calculation. It seems like a vicious circle.

Also, whay are alcohol and tobacco counted in inflation figures. They aren't essentials for everyday life....

dublinli

Mizu_Ger wrote:

Saw on the news this morning that inflation has increased slightly and one of the factors mentioned was higher interest rates. I thought that the purpose of increasing interest rates was to keep inflation under control. If this is so then why is it factored into the inflation calculation. It seems like a vicious circle.

Also, whay are alcohol and tobacco counted in inflation figures. They aren't essentials for everyday life....

The interest rates that you mention are mortgage interets rates whcih follwo the movements of ECB repo interest rates. However ECB follow an index of weighted average of HICP from all eurozone countreis and in that index mortgage payment costs are not included. These are included in the CPI.

fobster

Mizu_Ger wrote:

Also, whay are alcohol and tobacco counted in inflation figures. They aren't essentials for everyday life....

I've always thought a useful tool would be your own personal inflation indicator. For instance if you don't have a mortgage, take out mortgage repayments, don't have a car, take out car prices and petrol etc. etc. until you have a figure that actually reflects the rate at which your purchasing power is falling.

silverharp

it's a pity that economists have moved away from looking at money supply as being the main factor for looking at inflation. In the 1970 the money supply (M3 in the US) was an important reporting number for pricing bonds and interest rates, not so today yet the US and EU money supply is growing at around 13% and people are wondering why inflation is ticking up.

dublinli

silverharp wrote:

it's a pity that economists have moved away from looking at money supply as being the main factor for looking at inflation. In the 1970 the money supply (M3 in the US) was an important reporting number for pricing bonds and interest rates, not so today yet the US and EU money supply is growing at around 13% and people are wondering why inflation is ticking up.

i think ecb still uses m3 as an indicator, but as only one. remember trichet mentioning it in his speeches

silverharp

dublinli wrote:

i think ecb still uses m3 as an indicator, but as only one. remember trichet mentioning it in his speeches

they are a little better then the Fed, but if they toot it seriously they would never let money supply grow more then the increase in GDP, an asset bubble is inflationary and causes a misallocation of resources.