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Inflation and how its tackled

  • 30-11-2022 10:59pm
    Registered Users Posts: 15,053 ✭✭✭✭

    all the below is prefaced with me knowing nothing about how the whole thing works.

    rising inflation...the answer always seems to be a central bank increasing interest rates. the idea is (i think) less money to spend, inflation will slow.

    the banks increasing interest rates mean average joe has less to spend cos they pay more in interest repayments. that to me means the banks get more money in interest repayments, thereby making more money.

    would it not be better for VAT to be increased (as an example), thereby achieving the same goal but the government would have the extra rather than the banks?

    again, i dont know how the whole system works.


  • Administrators, Social & Fun Moderators, Sports Moderators Posts: 73,471 Admin ✭✭✭✭✭Beasty

    Increasing VAT increases inflation further

    In addition VAT is set at a national level and is a political decision. Interest rates are set at the Eurozone level by the non-political ECB

    And if the banks earn more interest they should also be paying more

    There are clearly some one off effects in play here but essentially inflation is telling us we've been paying too little for stuff (to some extent helped by low interest rates) and there needs to be a re-balance

    The problem is inflation leads to increased pay demands which simply adds to the inflationary cycle

    The most straightforward way to deal with it would be for everyone to take the hit now and accept no "inflation-related" pay rise. That is politically unpalatable and indeed pretty much impossible to do at the Eurozone level

  • Registered Users Posts: 14,445 ✭✭✭✭Fr Tod Umptious

    Increased interest rates also mean that banks pay more in deposit interest.

    Increased interest rates encourage saving.

    So people who can save are better off.

  • Registered Users Posts: 12,582 ✭✭✭✭Geuze

    If the inflation is due to a booming economy, there are two typical responses:

    (1) contractionary monetary policy CMP, i.e. the central bank increasing interest rates to cause spending to slowdown

    (2) your suggestion of contractionary fiscal policy, i.e. lower Govt spending or higher taxes

    The current 2021/2022 inflation is not really caused by a booming economy, that is complicating matters.

  • Registered Users Posts: 15,053 ✭✭✭✭y0ssar1an22

    is the point of increased interest rates not to reduce inflation via a reduction in spending power?

    i just dont see why banks should get more money to tackle inflation.

    fundamentally, it makes no sense to me.

    'prices are too high right now' and to stop that you will have to pay more on your mortgage repayments.

    just makes no sense.

  • Registered Users Posts: 15,053 ✭✭✭✭y0ssar1an22

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  • Registered Users Posts: 8,913 ✭✭✭Danno

    One way to stop inflation is for everybody to cut back on unnecessary spending and in particular target said cut backs on unnecessary imported stuff. If we don't do that, someone will step in and do it for us, collectively - be it the EU, Irish Government or ECB.

  • Registered Users Posts: 8,184 ✭✭✭riclad

    One of the causes of inflation is the rise in energy costs ,gas and electricity. This increases costs for hotels cafes and many company's that make products

    Company's have to make a profit to survive so they will charge more for products and services to the public

    Usually inflation is caused by banks lending too much company's or individuals so central banks raising interest rates is not gauranteed to reduce inflation in the short turn

  • Registered Users Posts: 25,469 ✭✭✭✭Peregrinus

    Banks don't really get more money when interest rates go up.

    Oversimplying a bit, the bank's profit is not the interest they charge on loans, but the difference between the interest the charge on loans and the interest they pay on deposits. If both the lending rate and the deposit rate go up, the bank's margin is unchanged. But there's more to it than that; the rise in interest rates should mean that people borrow less (so the bank is getting less interest on loans) but deposit more (so the bank is paying out more interest on deposits). Plus of course when interest rates go up there's a higher rate of bad loans and defaults/arrears on loans, all of which hit the banks' profits.

    So, no. Higher interest rates are not automatically good for banks.

  • Registered Users Posts: 5,273 ✭✭✭xxxxxxl

    Fight club. 🤑

  • Registered Users Posts: 3,047 ✭✭✭howiya

    Perhaps the EU could have introduced price caps on all fossil fuels and not just Russian oil. Might have helped with inflation...

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  • Registered Users Posts: 25,469 ✭✭✭✭Peregrinus

    Not really, since fossil fuel producers outside the EU, which is most of them, would sell their product in markets where the price is uncapped rather than in the EU; they make more profit that way. So all you'd end up with with is more acute fuel shortages in the EU, plus the incentives for a thriving black market.

  • Registered Users Posts: 3,047 ✭✭✭howiya

  • Registered Users Posts: 16,273 ✭✭✭✭astrofool

    Do you mean the russian price cap? It's for a different reason, and yes, russia will try and sell its oil to the regions without a cap, but they both consume less oil and don't have the transport infrastructure (pipelines) to get it there thus curtailing the amount of oil russia can export.

    If you mean a price cap "in general" i.e. not as a sanction, such as was tried with energy bills, that is just paid out of tax, so we pay it out anyway, the cost of the gas or oil (which are back down to "normal" levels) is the same, the government just tries to absorb the extra cost (how much extra is undetermined and the policy has no upper payout limit thus can't be budgeted for effectively as happened in the UK when they went to the markets to borrow, among other self-inflicted problems in that budget).

    Now, there is capacity for taking profits off energy companies, but this also needs to be carefully managed or they'll just sell their energy elsewhere or simply not buy the fossil fuels needed to generate power which would push Europe back to using coal or nuclear (the former taking a few years for ramp up, the latter taking about a decade).

  • Registered Users Posts: 3,047 ✭✭✭howiya

    No i don't actually mean that it be paid for out of tax. Make the oil/energy companies price takers like we are trying to do to the Russians.

  • Registered Users Posts: 16,273 ✭✭✭✭astrofool

    How does that work when they can just sell elsewhere? (And already explained why russia cant do the same and keep the volume, they can and will sell to everyone else), I mean, maybe every (non arab) country nationalises their energy reserves and keeps the oil for themselves, but that leaves Ireland with 0 oil. We can't set a cap ourselves as we have 0 leverage.

  • Registered Users Posts: 25,469 ✭✭✭✭Peregrinus

    They'll take the better prices that are offered to them in other markets. We cannot force them to sell to us at all, never mind at below market prices.

    The Russians, of course, are endeavouring to do exactly the same - selling to China, India, etc in preference to the EU. But their capacity to do this is limited by infrastructure - they don't have pipelines or shipping facility in place to sell the bulk of their oil and gas without sending it through Europe. So EU sanctions do badly hit Russian oil/gas revenues, which is their purpose. But the same tactic will fail miserably if applied to producers in the Gulf, in the Americas, etc.

  • Registered Users Posts: 3,047 ✭✭✭howiya

    I never said Ireland on its own. It works the same way as OPEC works to keep the prices up. If enough countries get together like the G7 and EU have in this instance there won't be other markets....

    The precedent of interfering in the free market has been set. Why can't the EU do the same for the benefit of its citizens?

  • Registered Users Posts: 6,249 ✭✭✭Allinall

    The point of increased interest rates is to discourage borrowing, and therefore restricting the supply of money in the economy.

    If it has the desired effect, then the banks will make less money, not more.

  • Registered Users Posts: 3,415 ✭✭✭Pa ElGrande

    Step 1. Negative interest rates. Affects business that need short term cash (pensions & insurance), ECB subsidises sovereign debt in eurozone countries. Goose demand, destroy savings.

    Step 2. Climate change. Discourage oil and gas exploration, use cheap money to subsidise alternative energy, while growing dependency on gas and oil from Russia. Add more taxes to energy consumption and sign a treaty to keep ramping up said taxes.

    Step 3. Covid lockdown. China & Europe. Disrupt supply chains and flood the system with cash ( much money/fewer goods). Cash flows to Amazon, online suppliers who use couriers who can bypass lock downs. Many local small scale suppliers cash flows destroyed. Should add deferred demand due to restrictions.

    Step 4. End lockdowns, supply chains out of sync, increase demand for energy, declare war on major energy supplier via sanctions. Still need energy, Longer and more expensive energy supply chains.

    Result: Shortages of key commodity i.e. fossil fuel, the classic inflation spiral, too much money chasing too few goods and services. Welcome back 1970s stagflation.

    Step 5: ECB tied to 2% inflation target, increases interest rates. The supply problem persists, monetary policy can't fix supply of goods, can only destroy demand for goods, but increase demand for cash.

    Post edited by Pa ElGrande on

  • Registered Users Posts: 16,273 ✭✭✭✭astrofool

    Peregrinus has covered that case. The EU has effectively blocked russia oil imports with the cap, putting caps on say, Saudi Arabian or American oil would just mean no oil for the EU from those locations and higher prices on the uncapped locations, capping everywhere would mean no oil at all or you end up getting the remainder that can't be sold at the uncapped price elsewhere.

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  • Registered Users Posts: 6,228 ✭✭✭Tombo2001

    When its imported inflation, its very very very difficult. Almost impossible to tackle.

    The thing is - commodity prices go up then employers have a choice - do I pay my staff more so that they arent seeing 'real' wage cuts (i.e. higher prices but same wages).

    Or, do I take the chance that I keep labour costs the same, maybe even make more profits, but take the risk of staff leaving because their real wages are declining.

    And so employers raise wages...and then you are into an inflationary cycle.

  • Registered Users Posts: 5,273 ✭✭✭xxxxxxl

    Well to be fair oil is a pretty easy one to tackle Countries can only use so much and store so much. And some countries rely on it heavily so would cave on price. OPEC have basically been let away with what they are doing.

  • Registered Users Posts: 3,047 ✭✭✭howiya

    America have agreed to this cap though. Why wouldnt they agree to a cap on oil prices to improve the lives of their electorate?

  • Registered Users Posts: 639 ✭✭✭techman1

    But the west is the biggest market for oil, China and India are huge aswell but remember they were sitting happy with their discount oil price vis a vis the west. Now this price has been reduced down to the level of the China discount price therefore they will be looking for a further discount like Fr Ted looking for the "clerical discount " in the cinema

  • Registered Users Posts: 3,415 ✭✭✭Pa ElGrande

    Ask what is happening on the ground for refined product? In Europe, a combination of product substitution, longer supply chains, hedging to secure supply, sanctions, strikes and limits on refining capacity for end products such as diesel will continue to dictate the price to the end consumer.

    Europe needs oil to substitute for gas: Europe’s industrial gas-to-oil switch stifled by capacity constraints

    Surging oil use for power generation and gas-to-oil switching are lifting the growth trajectory for oil demand, according to the IEA.

    IEA's estimates, provided to Reuters, showed gas-to-oil switching was 300,000 barrels per day (bpd) in the third quarter of the year and could reach 450,000 bpd in the fourth quarter, both almost twice the amount in the same periods last year.

    Europe’s diesel supplies will remain ‘tight’ as Russia embargo looms, Rystad says

    Europe is in a race to secure more diesel shipments before an EU ban on oil product imports from Russia, its biggest supplier, comes into effect on February 5.

    Faced with limited options, European traders have boosted their imports of Russian diesel before the embargo.

    “When it comes to diesel, the EU is caught between a rock and a hard place,” said Mukesh Sahdev, senior vice president at Rystad Energy.

    “There does not seem to be enough to meet current or future demand.”

    BP Accepts Labor Deal at Rotterdam Refinery, Resumes Operation

    New sanctions likely to drive diesel prices up further

    In Ireland, about 36% of cars, more than 80,000 tractors, and about 110,000 heavy goods vehicles and lighter commercial vehicles operate on diesel, along with diggers, excavators, generators, and other commercial equipment.

    Regarding inflation, any cost reductions are going to have to come from efficiencies or substitutions. Do you really need that part delivered overnight or 4 hours? To save money you may observe more empty shelves due to cheaper delivery rates taking longer to deliver. Many supply chains depend on just in time delivery, there will be a trade off due to costs involved.

  • Registered Users Posts: 16,273 ✭✭✭✭astrofool

    Is your question: Why won't the USA agree to a cap on the price it sells it's oil to other countries at?

    I'm unsure how to proceed further here, the russian oil cap price is a sanction, the reality is that it reduces the price of russian oil for others but pushes the price of the remaining non-russian oil up due to increased demand of a good with limited supply.

    If your question is "why don't they put caps on prices of things to stop inflation", the answer would be that we live in a free market system where companies and countries will set the price that the market can bear and when there are shortages, the good will go to those that pay the highest price (hence why Europe will survive on more expensive grain but Africa will have much less grain).

    I would ask you to elaborate more on your questions as it's unclear what you're getting at most times.

  • Registered Users Posts: 3,047 ✭✭✭howiya

    To be fair I'm being totally facetious but what I'm observing is that it's ok to interfere in the free market and cap the price of certain goods and not others. Whether its a sanction or not is irrelevant. Its about political will.

    Our own government won't cap rents for example because the political will isn't there.

  • Registered Users Posts: 16,273 ✭✭✭✭astrofool

    Ah right. Sanctions (which the oil price cap effectively is) are not designed to combat things like inflation.

    Trying to control inflation through price caps usually has the opposite effect and can end up causing runaway inflation (as a secondary black market for the good comes into play as the seller finds other ways to get the best price).

    You're really espousing some form of communism there, goods are cheap, you just need to be privileged to be allowed to buy them (which funnily enough happens a lot with rent controls, with the privileged being those who got there first).

    Now, there's no good simplistic slogan in there, so take it as you wish.

  • Registered Users Posts: 3,415 ✭✭✭Pa ElGrande

    Regarding rent caps there was a legal precedent in Ireland set in the 1980s that found this unconstitutional. Even with the current system of rent controls, taxation and regulations and demand for accommodation, landlords have fled the market. The only hotspot at the moment for landlords buying property is serving the refugee accommodation market and they will only buy if the sitting tenants are removed first.

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  • Registered Users Posts: 16,273 ✭✭✭✭astrofool

    I've seen this a few times, Paul Murphy particular whenever he talks about something, will say that everything can be fixed "with a stroke of a pen", it's a very simplistic slogan that appeals to his supporters, but as the likes of truss has found out, is not how the real world works.

    It's also very rooted in socialist ideology, I say what the rule is and everyone will follow that rule no matter how nonsensical (i.e. why would I see oil to Matt for $60 when Jim is offering $100, if it's illegal to sell it for $61 than Jim offers a bribe or untracked payment instead).