Increasing the interest rate to 5%, is this really the fairest way to slow inflation?

I dont think there is any need to be rude.

Having heard your thoughts[and I didnt ask you personally to reply], I havent really heard anything from you that has made me change my thoughts. That is all.

the Bank of England set out to stop the ever increasing rise of inflation by raising interest rates. And it seems to be working.

The falling inflation rate has nothing to do with increased interest rates. Prices are the same prices that caused the initial rise in inflation. They're just not rising so fast. You're still paying £1.50 for a loaf of bread that would have been £1 a year ago. ..

Is this a difficult concept to understand?

1st paragraph - that would make it a coincidence in that case. And you said yourself that stopping the money supply helps stop inflation. Which raising interest rates does.

2nd paragraph - that stops money supply as well.

3rd sentence - cant decide myself, whether that will happen or not.

I am not saying I have got things correct.
But I cant help thinking currently, that the Bank of England set out to stop the ever increasing rise of inflation by raising interest rates. And it seems to be working.

No, the interest rate hasn't slowed it down. It was always, barring another sudden supply side shock, like the energy price rises, going to slow down.

The interest rates have, if anything, made it worse because they have increased costs for anyone who needs to borrow money. As I said, business and personal loans.

All the interest rate increases look set to do is to take us into a depression...

I understand what you are saying.

But purely in terms of inflation, the interest rate of 5% has slowed it down. By the looks of things?

The inflation figure measures the rate of price increases over a specified period. A falling rate of inflation just means that prices are rising more slowly. It does not mean that prices are falling.

Inflation falls naturally once the initial effects of the price rises which caused it have worked through. So, for example, if an item which cost £1 at the start of a month costs £1.10 at the end of the month inflation is 10%. If it still costs £1.10 at the end of the next month inflation for that month is 0%. It will still cost you £1.10 to purchase it. The fall in inflation rate hasn't made it any cheaper.

There are two main reasons for inflation. One is too much money in the economy coupled with a relative shortage of goods and service available for purchase. Suppliers unable to meet the demand for their goods will raise their prices because people have the money and are willing to buy at a higher price to secure the scarce items. We've seen this with house price inflation.
In this situation increasing interest rates is to lower the amount of money available to meet the price increases. To lower 'demand' for them.

But if suppliers of essential goods, such as food and energy, raise their prices when there is no excess money/demand in the economy, raising interest rates will just make people poorer and slow the economy because they have little or no money to spare for anything beyond what they need for basic survival. Raising interest rates will also affect the suppliers of goods who have to pay more on business loans, higher distribution costs and higher raw material costs.

What has happened as inflation has risen is that people are borrowing more to be able meet the cost of living. this will cause serious problems in the future. Raising interest rates has just compounded the problem as they have to pay more interest on on their debts.

Inflation may be falling but the cost of living hasn't fallen.

These are worrying figures:

People in the UK owed £1,843.8 billion at the end of July 2023
This is up by £37.3 billion from £1,806.5 billion at the end of July 2022, an extra £702 per UK adult over the year.
The average total debt per household, including mortgages, was £65,661.
themoneycharity.org.uk/money-statistics/

Increasing the interest rate to 5%, is this really the fairest way to slow inflation?^Increasing the interest rate to 5%, is this really the fairest way to slow inflation?

Seems to have worked?
Or is it still to early to say?

I didn't offer it as the last word - just as a discussion point.

The article covers interest rates, house prices and so on further up, if you want to read it. You can get three articles a month free, I believe.

Just because the DT published the article does not mean that the contents are not debateable.

In the conclusion, there is no mention of inflation rates, around 25% in 1975. Nor that income tax rates were much higher than they are now.

There is a long article in the Telegraph today about the different generations' experiences of interest rates and expenses. It is behind a firewall, and is probably too long to post it all, but this is the conclusion:
It is true that this generation will soon benefit from much more appealing saving rates, which could help those who are not overly squeezed to build up their cash resources faster. The average rate in an easy access saving account is 2.36pc, up from less than 0.5pc two years ago.

Yet the rising cost of living means most families cannot leave their cash to grow – households pulled a record £4.6bn in savings from banks and building societies last month. And lurking in the background, the hidden tax of university debt continues to chip away at millennial income.

There is no denying that baby boomers went through considerable pain during previous mortgage rate shocks – but while the cost of borrowing is still low by historical standards, a sharp rise is still dangerous, if not more so, when the country is awash with debt.

This does not mean younger generations should begrudge their parents and grandparents the wealth they have slowly built over a lifetime. But the data suggest the market has rarely been so tough for this one, seemingly perpetually squeezed, generation.

Doodledog The lottery win. If only.

Germanshepherdsmum

Indeed Norah. Presumably nobody made these hypothetical people take out their hypothetical mortgage.

You appear to have taken against the hypothetical Mr and Ms Average .

There is really no point in people saying what they did, or their children/grandchildren are doing, as it is all so variable, so I just googled for average costs and incomes. In 'our day' we had different expectations and expenses - some greater and some lesser than others depending on circumstances. Also 'my day' will be different from that of others on the thread, as GN has members of different age groups, and as little as ten years can make a huge difference to prices, costs and affordabilities.

I neither recommend nor counsel against our mythical friends buying the imaginary house. They are hoping to win the lottery anyway

Casdon

Norah I found this which might give you an idea of what rental costs are on average. This covers the whole of South Wales, which I appreciate may be an area you don’t know, but includes cities, suburban, rural and a lots of deprived towns in the former mining valleys.
www.home.co.uk/for_rent/south_wales/current_rents?county=swales
Suffice to say it has been cheaper on average to mortgage than to rent.
www.home.co.uk/for_rent/south_wales/current_rents?county=swales

Thank you, Casdon.

Norah I found this which might give you an idea of what rental costs are on average. This covers the whole of South Wales, which I appreciate may be an area you don’t know, but includes cities, suburban, rural and a lots of deprived towns in the former mining valleys.
www.home.co.uk/for_rent/south_wales/current_rents?county=swales
Suffice to say it has been cheaper on average to mortgage than to rent.
www.home.co.uk/for_rent/south_wales/current_rents?county=swales

Doodledog I refer you to this document. www.money.co.uk/mortgages/first-time-buyer-mortgages/statistics

The situation is nowhere as dire as you suggest. First time buyer salaries and first time buyer house prices are neither as low or as high as you suggest.

Most first time buyers have been in the workplace for 10 years or so before buying and their salaries are above the figure you quote, considerably above it, in some places. Also they do not buy 'average' price houses for a first house, they buy houses at the cheaper end of the market, so again, except in London and the South East they have bought at well below the figure you quote.

Those whose mortgages are now coming up for renegotiation will have bought their house three-five years ago at prices around 20-25% lower than they are now. Those who had children under 5 when they bought their house, will now have school age children, so childcare fees will no longer be an issue.

Those who bought houses recently, 2 years ago or less, will still have a couple of years before their mortgage comes up for renegotiaton.

I am not suggesting things are easy at the moment. They are not, for anyone. We have heard today about the net movement of saved money from Building Societies and their like, as people of all ages and all tenures struggle to manage in a time of high inflation.

All I am saying is that what is happening now has happened before and will happen again. There is now far more help for those mortgage holders who are struggling and they stand far more chance of keeping their home than at any other time in the past.

I am not suggesting things are easier for young people now, I do not think they are, but more to the point, they are not much harder either.

M0nica

Norah Rents vary scross the country, but basing it on where most of the population live. It is well nigh impossible to rent a property with 2 bedrooms for under £1,000 a month, and for most people the figuree will be in the £1,500-£2,000 range.
Childcare can cost £1,000 a month or more.

I attempted factoring childcare and rental costs in for Doodledogs mythical 2 child couple. I assume - money leftover after paying rental costs, perhaps save for a rainy day!

I'm totally ready to be proved wrong. Happens often.

Doodledog made a fantastic buying with mortgage example. Perhaps an example of rental averages (apart from London)?

Norah Rents vary scross the country, but basing it on where most of the population live. It is well nigh impossible to rent a property with 2 bedrooms for under £1,000 a month, and for most people the figuree will be in the £1,500-£2,000 range.
Childcare can cost £1,000 a month or more.

Indeed Norah. Presumably nobody made these hypothetical people take out their hypothetical mortgage.

I don't find anyone smug or self righteous, by the way - just curious.

Doodledog

Well, obviously you could Google for something nearer to you, but the first thing that came up for me was Average monthly rents hit £2,500 in London and £1,190 for rest of UK (Renting property The Guardian. 27 Apr 2023)

Doodledog Thank you.

I know this is a big guess.

If your mythical 2 child couple lived outside London, I'd guess they could rent, have money to spare for whatever life throw at them. Say, save for a deposit and towards payments/ build a cushion.

There is always time to wait. Or so I tell my silly brother.

Well, obviously you could Google for something nearer to you, but the first thing that came up for me was Average monthly rents hit £2,500 in London and £1,190 for rest of UK (Renting property The Guardian. 27 Apr 2023)

Doodledog

I assume they bought because they needed somewhere to live, and had nobody to donate them a house?

I'm not sure about the link between student loans and intelligence, really. They are compulsory unless people have someone to donate the fees and maintenance costs of education - something else that we didn't have to consider.

We bought our first house in 1978/9. The repayments shot up immediately. Yes, we borrowed a smaller multiple of our income, but like everyone else we can't take credit for that as it wasn't our wisdom that stopped us from borrowing more - it was just the system. We weren't rushing in, either. A friend had bought an identical house (a tiny modern 'starter home' on boring estate three years earlier for half what we paid. How were we to know that three years later ours wouldn't cost twice as much again? It wasn't a case of over-reaching - there was nothing cheaper, really.

That was in the past, and I can't remember a lot of detail, but energy bills weren't huge then, and life was simpler - nobody had or needed computers or phones, or digital TV, so outgoings were lower too.

I was 22 when I married - a year after buying the house. My children are 10 years older now. Both have good jobs, but neither has a mortgage yet, as they pay hight rents and deposits are insanely high. They have done nothing wrong, any more than my generation did anything right. It is just harder for young people now, I think.

I also think that there is no virtue in suffering, and the fact that this has happened before doesn't make it easier for those going through it now. I don't think that the rates rises are 'unfair' - but I am starting to understand why some younger people resent older generations for smuggery and self-righteousness.

Doodledog I was 22 when I married - a year after buying the house. My children are 10 years older now. Both have good jobs, but neither has a mortgage yet, as they pay hight rents and deposits are insanely high.

If I may ask. Anyone may answer.

What are insane rents, currently? Surely less than house payments? I know this is a location specific question, but I've no idea except undesirable, far from the city farm homes.

Indeed maddy, and no assistance from lenders as Norah says.

I am not disputing that. It was awful - as I say, we were caught in the thick of it, and again in the late 80s when we moved from the tiny house to a bigger one as we wanted to start a family. We had to get a much bigger mortgage, as the sale of council houses happened when we were in the tiny house, and they were a better buy for people at that end of the market, so we made very little on the sale of ours.

We had 2 babies and fixed at something like 16% for five years, as we were afraid the rates would hit 20%. The stress was awful, and the news was full of stories of people losing their homes, as well as high unemployment.

But people need somewhere to live. They have no choice but to pay what houses cost. They need them when they need them - not everyone can wait until the market settles down (if ever). I don't think that we can question the intelligence of today's young people, or accuse them of being 'fools' for having mortgages when the alternative is paying someone else's mortgage by renting.

The other difference I notice is that no one felt ‘sorry’ for younger people with mortgages in the past when rates were so high. We were just expected to ‘get on with it.’ Well we were anyway, and the fact that we cut everything to the bone and could barely afford to clothe our children was just tough. It is what is, it’s nothing new.