Rising Oil Prices. We can’t blame just China for rising oil prices. But, it is a factor. There is not much UK government can do about that.

Decline In Manufacturing Sector. The government can always try to implement better supply side policies to improve productivity of industry, but, there is a limit to how much they can do. Governments may need to just accept the changing structure of the economy.

Environmental Problems. A problem of Chinese growth is the increase in carbon emissions. Growth from China can easily dwarf any savings the UK make. Not much government can do about that.

Current Account deficit. I would say that blaming China for current account deficit misses the point. Most of the deficit is caused by a decade of high consumption and low savings.

Lower Goods Inflation. Chinese economic growth has been characterised by low priced manufactured goods. The price of items such as clothes and electronic goods has consistently fallen, helping to maintain low inflation. This downward pressure on prices is particularly helpful given current cost push inflation pressures from energy and food.

Higher price of raw materials. As well as contributing to lower goods inflation. You could argue China’s growth is contributing to rising prices of raw materials e.g. oil. The economic growth in China is pushing up demand and therefore price of oil, which is having an impact on Western inflation

Decline In Manufacturing Sector. The UK’s manufacturing sector has been in relative decline since early 1980s. Chinese growth has in a way speeded up this process as British firms with higher labour costs become uncompetitive compared to Chinese firms.However, the Manufacturing sector may have declined anyway and upto recently job losses in manufacturing sector have been absorbed in service sector.

Current account deficit. The above factor has caused a deterioration in the long term trade balance between UK and China.

Service sector Inflows. Trade between China and UK is not just a one way process. China is increasingly using its financial clout to buy British goods and services. A good example, is education.

“The long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again. ”

“In truth, the gold standard is already a barbarous relic.”

-Monetary Reform (1924), p. 172

“If economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid.”

- “The Future” Ch. 5, Essays in Persuasion (1931)

” There is no harm in being sometimes wrong — especially if one is promptly found out.”
- Essays in Biography (1933)

“The day is not far off when the economic problem will take the back seat where it belongs, and the arena of the heart and the head will be occupied or reoccupied, by our real problems — the problems of life and of human relations, of creation and behaviour and religion.”
- First Annual Report of the Arts Council (1945-1946)

“The book, as it stands, seems to me to be one of the most frightful muddles I have ever read, with scarcely a sound proposition in it beginning with page 45 [Hayek provided historical background up to page 45; after that came his theoretical model], and yet it remains a book of some interest, which is likely to leave its mark on the mind of the reader. It is an extraordinary example of how, starting with a mistake, a remorseless logician can end up in bedlam.”

* On Friedrich Hayek’s Prices and Production, in Collected Works, vol. XII, p. 252

” Education: the inculcation of the incomprehensible into the indifferent by the incompetent.”
o As quoted in Infinite Riches: Gems from a Lifetime of Reading (1979) by Leo Calvin Rosten, p. 165

“When the facts change, I change my mind. What do you do, sir?”
o Reply to a criticism during the Great Depression of having changed his position on monetary policy, as quoted in Lost Prophets: An Insider’s History of the Modern Eonomists (1994) by Alfred L. Malabre, p. 220

“Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone.”
o As quoted in Moving Forward: Programme for a Participatory Economy (2000) by Michael Albert, p. 128

“Successful investing is anticipating the anticipations of others.”
o As quoted in Isms (2006) by Gregory Bergman, p.105

“The market can stay irrational longer than you can stay solvent.”
o As quoted in The Politics of Public Fund Investing: How to Modify Wall Street to Fit Main Street (2006) by Ben Finkelstein

“He had one illusion — France; and one disillusion — mankind, including Frenchmen.”

* On Georges Clemenceau, in Ch. 3
“The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.”

“Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits—a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.”
Paraphrased variant: “The markets are moved by animal spirits, and not by reason.”

So surely if inflation hits 10% (I know that is unlikely, but let’s just say, for the sake of argument), and since I do not propose to move again, then the cost of my house (which remains thus static at what I paid for it) IN REAL TERMS will drop faster so that, assuming my salary at least keeps up with inflation, I’m going to be better off than if the £300,000 I paid still “feels” like £300,000 in 10 years’ time?

Thanks for the question. You raise a good point. Inflation is generally considered to be a damaging thing for the economy. There are many costs of inflation such as uncertainty, declining competitiveness, menu costs. For full explanation see: Costs of inflation. However, although inflation is generally bad, there are some people who will benefit from inflation (as long as nominal wages rise faster than inflation)

If you keep money under your bed, inflation will reduce the value of your savings. But, if you borrow a fixed amount, inflation makes it much easier to pay back (assuming wages keep pace with inflation, which generally they do in OECD economies)

When people are considering whether to buy or rent, they often forget the importance of inflation. They look at the cost of mortgage payments and focus on how expensive they are. But, these mortgage payments historically, decline in real terms over the course of the mortgage.

When I took out my mortgage in 2004, I paid £800 a month. Nearly 45% of my post tax income. But, I saw it as an investment. If my salary increases by 4% a year (not unreasonable given past trends), my mortgage payments will decline as a % of income. (It is now 40% of disposable income. In 30 years time, when I am still paying my mortgage, I expect £800 to be a relatively small % of income. Just like your example.

If I continue to rent, the cost of renting is likely to rise by at least inflation (In Oxford, rent has increased faster than inflation). Therefore in 30 years time, I’m sure monthly rent, will be much more the cost of my mortgage.

Interest Rates Inflation and Mortgages

The only problem with rising inflation is that as inflation rises, interest rates usually rise. For example, in 1991 inflation and interest rates reached double figures, making the cost of mortgage payments rise temporarily. This led to a record rise in repossessions. If inflation was to rise to 10% like in your example, I would expect interest rates to increase to 12%, this could double your mortgage interest payments. My £800 a month would increase; I may even be unable to pay it. But, you are right, the £300,000 mortgage would become worth less.

However, if you took out a fixed rate mortgage you could insure against this spike in interest rates.

Nevertheless, assuming fairly constant average inflation and interest rates. Mortgages definitely become easier to pay back over time. Inflation and real wage growth make it much easier to pay back.

The best thing would be for inflation to stay at 3%, interest rates to stay at 5% and nominal wage inflation of 5% (making real wage growth of 2%) This would lead to a gradual reduction in the real value of your mortgage debt, without having spikes in the cost of mortgage payments.

The problem with that inflation is that it reduces the value of money. It is the same with grade inflation. Because twice as many people get an A grade, an A grade has become devalued. This benefits those who get a lower A and would have previously received a B. However, it is not good for those who get a high A. What is the point in getting 89% on a paper, if you could have got an A with 60%

The other main problem is that the top universities find it difficult to choose candidates. So many people get 3 As that it is hard to discriminate for the most popular courses. Unsuprisingly universities are increasingly using their own admission tests to choose between candidates.

But, it means A Levels are not doing their job. Universities shouldn’t need to be setting their own tests. It’s about time the government and QCA realised that grade inflation benefits noone and certainly doesn’t ‘prove’ improving educational standards.

• Are A Levels getting easier
• Universities shun A Levels for own tests at Independent

I have previously written why I disagree with this populist move - 10 Reasons not to cut Petrol Tax

The difficult thing is how the Chancellor is going to finance this tax cut? (£2.6 billion)

• Government Borrowing is already reaching record levels.
• Stamp duty tax is falling
• A recession would lead to lower income tax and VAT revenues.
• People don’t like paying petrol tax, but, I doubt they will be overjoyed to have a 1p increase on the basic rate of income tax.

Variations in Inflation Rate

From the diagram below, you can see the large variations in inflation for different groups of goods.
Food, energy and education are the worst affected (interestingly people never talk about inflation here)
If you like buying cheap clothes from Primark and using a mobile phone, it’s not so bad though.

• Price of Milk has increased 22% to 43p a pint.
• Price of Petrol has increased 21% to £1.18

Zimbabwe inflation

Spare a thought for Zimbabwe; their inflation rate passed the 2.2million % rate. Zimbabwe inflation

In the US, the Federal Reserve have had to support 2 of the biggest mortgage companies Freddie Mac and Fannie Mae. Fannie mae and Freddie Mac are mortgage companies who mainly buy or guarantee mortgages offered by other banks. Together, the two firms own or guarantee about $5.3 trillion (£2.7 trillion) worth of home loans - about half the outstanding mortgages in the US. That is about 25 times as big as the Rock’s obligations, and twice the size of the UK economy. It is widely agreed that they cannot be allowed to go bankrupt.

The Cardboard bike needs no oil.

High oil prices have come as quite a shock to many. What is the best way to deal with them?

For a cyclist, like me, high oil prices are the best thing since the invention of dérailleur gears. Quiet roads, less chance of getting run over by a car; I’m just praying for the $300 barrel.

These folks aren’t so happy though, they are praying for lower gas prices. Poor God, what can he do? Some people are praying to save the environment, and some people praying to have cheap Gas so they can continue to drive without having to pay too much. Why pray for world peace, and elimination of poverty  when you can pray to have cheaper Gas prices?

Solar Powered Cars

Solar powered cars. No petrol required. Not sure how far it would travel in the UK though. The European monsoon has arrived again….

For those with petrol cars, you could try these tips to reduce petrol consumption

• How I learnt to love renewable energy and stop worrying about petrol prices
• 10 Reasons not to cut Petrol Tax

Some products become much better, with more features and more userability. For example, the features on a mobile phone have increased dramatically in the past 10 years. If we buy more expensive models of mobile phones, can we really say that is inflation? We are buying better quality products and so in a way the price is going down, because we are getting more for our money.

For example, the number of features on a top of the range vodaphone phone increases 50%, and the price is 5% higher. Is that inflation of 5% or deflation of 45% ?

Hedonics is the ’science of trying to work out how much product quality has changed and adjusting prices accordingly. It is used in the US calculation of inflation, I’m not sure about the UK.

• Is inflation under or overestimated?