Economics.

[EFLImpudence]

Could some clever person or soothsayer please explain:

http://www.bbc.co.uk/news/business-41238822

Because the pound has fallen in value (since the referendum ~ 20%) imports are dearer causing inflation to be higher than expected - 2.9%.


Yet, this has caused the pound to "bounce back" - well, 1% up.

Should the casino be closed?

 

[chris1982]

I dont't know what casino you are referring to, but the argument, or journalist's guess, is based on a policy response by the Bank of England.

If the BoE responds to the higher than expected inflation rate by increasing their interest rate, it would trigger a higher rate of return on sterling denominated financial assets. This would make them more attractive compared to foreign assets, thereby increasing demand for them. To buy these assets you need to have sterling, so the demand for sterling would rise, leading to higher value of the pound.

If financial markets anticipate the pound's value to increase in the future, some traders will buy sterling already today as they try to capitalize from the expected appreciation. In turn this means that the pound increase in value already today (and in fact might not increase any further when the BoE actually increases rates - but only if the markets as of today expect with certainty the BoE rate rise)

 

[EFLImpudence]

The casino is the financial market speculation department.

My point was that it appears that -

the consequence of a weak pound are the reason it has risen in price.

This makes no sense however you explain it.

 

[SirGalahad]

Could some clever person or soothsayer please explain:

http://www.bbc.co.uk/news/business-41238822

Because the pound has fallen in value (since the referendum ~ 20%) imports are dearer causing inflation to be higher than expected - 2.9%.


Yet, this has caused the pound to "bounce back" - well, 1% up.

Should the casino be closed?

Monetary drag. What you see is the spot rate and what the inflation is showing is the rate a few months ago where the pound was weaker.

But they should close the Casino if you are referring to Casino Capitalism.

 

[SirGalahad]

The casino is the financial market speculation department.

My point was that it appears that -

the consequence of a weak pound are the reason it has risen in price.

This makes no sense however you explain it.

What doesnt make sense?

 

[IWalkLikeHimaMartian]

The apparent difference between price rises at about 20% and the inflation rate is explained in the article:

Here's a few details from the inflation numbers. Coffee - up 5.1%. Petrol - up 5.1%. Clothing - up 5.1%. Oils and fats (including butter) - up 5.9%. Electricity - up 9%. Then there is the price of fish - up 9.6%.

Now of course to get the average rise in the cost of living you have to lump in those moves with other items falling in price (air fares, second-hand cars, toys and games) to get the average of 2.9%.

Additionally, a weak pound does help exports.
However Brexit will adversely affect exports, depending on any deal concluded.

To add to chris's explanation:

Before the figures came out, traders in the City had anticipated a rise in interest rates by next May. Now they're betting it's more likely to happen next February.

 

[chris1982]

My point was that it appears that -
the consequence of a weak pound are the reason it has risen in price.

The initial fall in the pound was due to the UK becoming less attractive for (foreign) investment. This was probably amplified by the BoE rate cut after the referendum.
You are right that this is the main driver of the increase in inflation we have experienced.

This makes no sense however you explain it.

You could look at it from a different point of view. Had the pound not devalued in the first place, the UK economy would have experienced a contraction after the referendum as it became less attractive to investment, which by itself would have led to a contraction in economic activity.
The fall in the pound however stimulate domestic production, as exports became relatively cheaper and imports more expensive.
Now that the initial shock from the referendum has faded, the pound is (partially?) reverting back towards its original value. But the period with lower valuation helped to stabilize the economy.
What I mean is that swings in the exchange rate are not necessarily bad, as they cushion some of the swings in demand and supply and thereby smoothen GDP and employment over the business cycle.

(By the way, it is possible that the reducation in the BoE rate and the fall in the pound is the main reason why there was no recession after the referendum - some Brexiters like to bring up the lack of a recession as evidence for no harm done, but they forget (i) the initial fall in the pound, (ii) the rate cut and further devaluation of the pound, (iii) the subsequent rise in inflation, and (iv) most importantly that so far the UK is still in the single market and the EU, so the worst might be still to come).

 

[EFLImpudence]

What doesnt make sense?

That the obvious consequence of the pound falling is a reason for the pound rising.

 

[JohnD]

if you're comparing the pound against the dollar, bear in mind that the dollar is on a downward slide, not just against the pound.


dollar against Euro

dollar against Chinese Yuan

dollar against pound

Does this tell you that the pound is doing well? Or that the dollar is doing badly?
Trumpety-trump, said Nellie.

Here's the pound against the Euro. Where we do the largest proportion of our international trade.

 

[IWalkLikeHimaMartian]

That the obvious consequence of the pound falling is a reason for the pound rising.

It is not an obvious consequence. It is a factor in a system with multiple other factors. Any one factor can have a negative or positive influence on any one or more of the other factors.

Additionally, the pound has gone from 1.08 to about 1.1, after being in the 1.2 to 1.45 region for years. So only a tiny regain of its previous losses.

 

[EFLImpudence]

I was only considering the euro.

Maybe they shouldn't have used the term "bounced back".

 

[JohnD]

dead cat.

 

[Doggit]

God, doesn't anyone here understand economics.

The pound falls, so goods we export are cheaper, and goods we import are more expensive. The pound initially fell by about 20%, but that doesn't translate into a 20% rise in inflation, because it's the raw goods that cost 20% more, not the final price. The final price is made up of raw goods, transport costs, and profit at several points, so the raw material rise isn't the same as the final store price. In addition, a lot of stores absorbed some of the initial rises by cutting their profit margins. Then the pound started to rise again, so the period that inflation is compared against doesn't cover the same period as the punds fall and then rise. I think the pound has risen against the dollar to close to the rate it was before Brexit (ignoreing the blip to $1.50).

But inflation only went up by 2.9% because it covers a variety of goods and service, some of which went down (oil I think, and mortgages), whilst imports went up, so there's no real short and quick answer to this problem.

But yes, the value of the pound against any other currency, is effectively just a casino, and the governments have no control over it. It's the money markets that either have confidence in a currency, so will buy it, which makes it rise, or they have no real faith in where a country is going, so will sell that currency, and it'll fall. Gerorge Soros actually made the pound fall some time back, by just betting against it, and that caused the markets to react, and it became a self fulfilling prophecy. Coupled with the fact that a lot of stocks and shares are now bought and sold by computers that will sell if a certain point is reached, so that makes a share price drop, and that makes other computers sell the shares, so again it becomes a non stop fall that may not have had any real justification.

If you look at a countries share indeces, you can see seasonal flcutuations that are more determined by holidays and the need for liquid cash at certain times of the year, so the stock market is also driven by the things people do, sometimes more so than what the shares and companies are actually doing.

 

[EFLImpudence]

I think the pound has risen against the dollar to close to the rate it was before Brexit (ignoreing the blip to $1.50).

Well it depends what you call close.

Ignoring the blip, if you want, but the mean at the time was around $1.45 after being higher. Now it is $1.32.

But inflation only went up by 2.9% because it covers a variety of goods and service, some of which went down (oil I think, and mortgages), whilst imports went up, so there's no real short and quick answer to this problem.

The rise was attributed to petrol and clothing in the BBC link.

Confidence is one thing but the world being run by pure speculation for quick profit is not good enough.

Of course, for a while now, there has been no speculation between the French and German currencies but we wouldn't want that sort of thing, would we?

 

[EFLImpudence]

As I have asked before but I don't think there was a satisfactory answer. Perhaps you economic geniuses can do so now.

Had Britain joined the euro at its inception when the rate would have been set at, I believe, at 1 pound to 1.45 euros. Is that correct?

Does the fact that since then the pound has frequently fallen below but never risen above that value mean that Britain would have been better off joining?

Or is it the old case of:
weak pound - bad for Britain;
strong pound - bad for Britain.