Economics help blog – Page 35

Does rising interest rates always result in fall in house prices?

30 May 2022 by Tejvan Pettinger

Readers Question: Does rising interest rates always result in a fall in house prices? No. It doesn’t always cause a fall in house prices. But, looking at historical data, when there is a sustained and significant rise in interest rates, it is very likely house prices will fall. For example, the 1981 and 1991 house …

Why Russian Ruble has appreciated after sanctions

26 May 2022 by Tejvan Pettinger

Despite unprecedented economic sanctions imposed on Russia, the Russian Rouble has become the best performing currency in the world. Rising 30% in the year 2022 to 26 May 22 (source: Reuters) After the initial sanctions and freezing of Russian foreign currency reserves, the Russian rouble fell 25%. But, since then the Rouble has performed a …

Immigration and housing

17 June 202223 May 2022 by Tejvan Pettinger

Is net positive migration a factor behind the UK’s recent rise in house prices? Given the rapid rise in house prices since the mid-1990s and the corresponding rise in the number of immigrants, it is hard to avoid the conclusion that levels of net migration are having, at least, some effect on exacerbating the UK …

Product life-cycle

19 July 202221 May 2022 by Tejvan Pettinger

Definition: The product life-cycle (PLC) refers to the different stages a product goes through from introduction to withdrawal. The product life-cycle refers to a likely pathway a product may take. It has implications for the marketing strategy of a firm as it seeks to introduce, grow and maintain market share. In this case, the product …

Effect of higher interest rates and lower taxes on living standards

19 May 2022 by Tejvan Pettinger

Reader’s Question: The Central bank is raising interest rates (I understand why). At the same time, the government is being called to reduce taxes. These appear contradictory policies to me? What am I missing? In summary You are right they tend to have opposite impacts on consumer spending and economic growth. Higher interest rates tend …

UK Inflation Rate and Graphs

27 November 202417 May 2022 by Tejvan Pettinger

Current UK Inflation Rate

uk-inflation-oct-24

uk-inflation-90-24

CPI inflation rate: 2.3% (headline rate) CPI – D7G7 at ONS

Source: Raw data General inflation tables | CPI annual % change D7G7 at ONS

Other measures of inflation

(CPIH) CPI including owner occupiers’ housing costs – 6.2% (CPIH – L550)
See: Measures of inflation

Reasons for low inflation in the UK until 2021

Low worldwide inflationary expectations. Europe is experiencing very low rates of inflation.
Fall in global inflation rates since 2007.
Reduced consumer spending due to Covid downturn
Weaker commodity price growth.

Reasons for surge in inflation during 2022

Rising oil prices
Rising gas prices
Ukraine war disrupting gas/energy and food supplies.
Lingering supply side issues from Covid lockdowns and impact on price of shipping.

Inflation trends in the UK

Despite temporary cost-push inflationary factors in 2017, underlying inflationary pressures remain muted – at least compared to the past four decades.

The current UK inflation rate compares favourably to much of the post-war period.

1970s Inflation

The 1970s frequently saw double-digit inflation. This was due

Cost-push factors – rapid rise in oil prices
Rising wages due to powerful trade unions trying to keep up with living costs.
Lack of independent monetary policy
Inflation expectations rose

Late 1980s inflation

The inflation of the late 1980s was due to

Rapid economic growth ‘The Lawson Boom‘ – growth was above the trend rate causing supply shortages
Rise in house prices fuelling wealth effect
Lack of independent monetary policy. The policy was partly set by ‘shadowing the D-Mark’ which led to loose monetary policy in late 1980s

Inflation and wages

Real wages = nominal wages – inflation.
Usually, during a period of economic growth – wage growth is higher than inflation, this leads to positive real wage growth.
During the economic recession of 2009-13 – we had a prolonged period of negative real wage growth. Wages rising at a slower rate than inflation.
The end of 2014 saw the first signs of renewed wage growth and positive real wage growth.

wages-inflation-mar-2022

Since 2008, there has been an unusual period of negative real wage inflation. (inflation higher than wage growth)

However, since the recovery from the Covid downturn, there has been a sharp increase in wages (likely to prove temporary)

See more at UK wage growth

Inflation since 1990

Inflation rose over 8% in the late 1980s due to the Lawson boom, which was a period of unsustainable economic growth.
Inflation was low in the period 1992 to 2007. This was a period known as the ‘great moderation’
The inflation of 2008 and 2012 was due to cost-push factors (devaluation and rising commodity prices)

Policies to reduce a budget deficit

17 June 202217 May 2022 by Tejvan Pettinger

A look at different methods to reduce budget deficits. In summary, the three main policies are:

Cut government spending
Increase tax
Achieve faster economic growth.

A budget deficit occurs when a government spending is greater than tax revenues. This leads to an accumulation of public sector debt. If the deficits are unsustainable, this can cause rising bond yields (higher interest payments) and in the worse case, lead to a loss of confidence in the government. Though this is quite rare for countries with their own currency (i.e. not in Euro)

uk-net-borrowing-55-22-marks

The obvious way to reduce a budget deficit is to increase tax rates and cut government spending. However, the difficulty is that this fiscal tightening can cause lower economic growth – which in turn can cause a higher cyclical deficit (government get less tax revenue in a recession). The best way to reduce fiscal deficits depends on the situation a country is in.

Different policies to reduce a budget deficit

1. Cut government spending

The government can cut its public spending to reduce its fiscal deficit. For example, in the 1990s, Canada reduced its public spending quite significantly. They evaluated many different departments and cut spending by up to 20% within four years across the board. This proved a successful policy in reducing the budget deficit. During this period of spending cuts, the Canadian economy continued to grow which also helped reduce the budget deficit. However, during the spending cuts, the Canadian economy benefited from lower interest rates to boost spending, higher exports to the US, and a weaker exchange rate. The strong economy made it much easier to cut spending.

Real wages definition

5 July 202215 May 2022 by Tejvan Pettinger

Definition Real wages show the value of wages adjusted for inflation. Real wages are a guide to how living standards have changed. For example, if nominal (actual) wages increased 5%, but inflation was 5%. This would mean the purchasing power of your wages had stayed the same. The net effect would be the same as …