CHIEF MINISTER Lyndon Trott has responded to concerns about proposals to set Guernsey’s own inflation target.
He said that the island needed to do something because of the volatile nature of the current Retail Prices Index.
The Policy Council wants to use RPIX – which unlike RPI does not take account of mortgage interest payments and other housing-related costs – to calculate pay settlements.
It has also suggested setting an inflation target of 3%, raising the prospect of smaller pay rises in the future.
Deputy Trott said he believed that would be the right move for the island.
‘The rationale of using a measure of inflation that does not include the mortgage interest element is the same for all countries,’ said Deputy Trott.
‘That is that the mortgage element responds to changes in the interest rate for obvious reasons: interest rate goes up, mortgage repayments go up, hence inflation (if it includes mortgage payments) goes up. However, in most countries interest rates are the primary weapon against inflation.’
This reasoning has led to the target of RPIX for inflation.
Deputy Trott said interest rates would not become a weapon against local inflation, but the changes were necessary.
‘We do have certain tools to ensure that the differential between the UK and Guernsey inflation is reduced to a minimum.’
The Bank of England used the RPIX figure to calculate its targets until 2003, when it moved to using a Consumer Price Index, or CPI.
Changing from RPI to RPIX has sparked controversy.
Union leaders said they had not been consulted on the possible changes and were not looking to use RPIX in the future due to the cost of mortgages in the island.
Article posted on 15th June, 2009 - 11.30am
16 Article Comments
That’s right dump RPI as a measure when the figures don’t look good.
No doubt RPIX will be abandoned in the future too.
It’s all smoke and mirrors.
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RPI may be volatile but it is a realisitic measure of the price inflation which we Islanders are subject to (including those people who are in the unfortunate position of having their pay levels determined by the States).
Changing which index he uses may make Lyndon Trotts figures look better but this won’t change economic reality for Islanders.
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Why not scrap all the old RPI stuff and introduce the brand new LTI named after our esteemed Chief Minister?
We could even have an ‘LTI 4Kplus’ for making future yearly payments to the airport firemen.
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Inflation is theft. It is so endemic that people talk about it as if it is accepted, which I suppose in a way it is. Though it is theft and i’m surprised that such a high proportion of the population accepts it. A measure of societies ignorance perhaps or a measure of elitists intelligent superiority?
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Steven – how can inflation be theft?
Who is stealing what from whom?
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CD How can inflation be theft?
Money is a store of purchasing power. If inflation rose by 5% in twelve months a £10 note in your pocket would be worth (in purchasing power) 25p less after the twelve months had passed.
Who is stealing what from whom?
Puchasing power is being stolen from everybody that holds money, by the money issuing banks. The governments are complicit in the theft by way of taxing interest paid on monies deposited in the banks. The taxing authorities should make allowance for the reduction of purchasing power due to inflation offsetting this with the interest paid and then tax the balance if there is one, chances are there isn’t. The banks are effectively borrowing depositors monies for nothing as the interest they pay sometimes does not clear the level of inflation (theft) that they had created.
The Bank of England is privately owned as is the Federal Reserve of America. I would challenge you to assertain who owns them.
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Steven
How is the publicly owned Bank of England really privately owned?
Please enlighten me.
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Interesting angle Steven.
I would contend that inflation is driven by forces beyond the control of money issuing banks (and to a large extent beyond the the control of government fiscal policies). Taxation of deposit interest is another matter altogether.
In Guernsey we have a relatively wealthy population with a high disposable income which they want to spend an various goods and services – so demand is high.
We also live on a tiny little rock in the ocean and we have a limited number of suppliers of those goods and services – so supply is restricted.
When demand outstrips supply you get inflation. Not much the banks or the government can do about that.
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Woohoo!!!!!
High finance conspiracies, I just love these. Where’s my tin foil hat?
Right, bit of mis-information from you there CD, as far as I know The Bank of England is actually state owned. However would be happy to be proved wrong.
Things are a bit more muddy with the Fed in the US it’s supposedly state owned, I’m not necessarily convinced by that one but there we go……….
Also CD I really don’t follow your argument on how banks ‘create’ inflation at all.
Are you sure that inflation isn’t actually a chaotic combination of factors including, but not limited to:- national debt/ money supply, imports Vs. exports, personal debt, interest rates, GDP, worker wage increase expectations, taxation regime, world commodity prices….. and so on.
You could also add to all this that since our currencies are all basically ‘Fiat’ then all money only ever actually exists as debt anyway and it’s only function is as system to pay taxes in.
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Halfmanhalf biscuit – I think you are getting my comments mixed up with Steven’s there.
Agree with you about the chaotic influences behind inflation though – my argument was too simplistic on that.
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Steven – as taken from the Bank of England website:
“As a public organisation, wholly-owned by Government, and with a significant public policy role, the Bank is accountable to Parliament.”
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Sorry CD I did indeed get you both mixed up!
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TL I’m still to be convinced on the Bank of England. Them saying they are are owned by Government is a bit like a convicted thief saying he didn’t do it.
halfmanhalfbiscuit. A money issuing bank can create inflation by issuing more money. If no more money is issued you actually get deflation with a rising GDP. (Gross domestic product). Given a static GDP and a static money supply items would vary in price according to the supply and demand but collectively would remain the same cost i.e. as one item rose in value another would drop.
Interestingly with deflation the purchasing power of the ten pounds in your pocket actually increases.
Control of inflation using interest rates is limited to slowing or speeding up the inflation rate but you can’t create inflation or stop it with interest rates, although it would appear that you can it is an illusion that exists in a small time frame.
The Policy Council to be suggesting setting an inflation target shows either ignorance or a belief that they have the people fooled. For they may as well suggest a game of pin the tail on the Donkey. Which in a way is really what is being suggested if they are going to try limiting workers pay rises to an inflation target.
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Steven, wow I didn’t realise I was dealing with an economic genius here, but there again I can’t even direct my argument to the right poster sometimes!
“A money issuing bank can create inflation by issuing more money.”
NO. Issuing money can devalue the existing currency but it does not ‘create’ inflation, it’s a purely independent concept. Granted the normal consequence would be inflationary pressure but if the UK was in a period of extreme deflation would running the printing presses suddenly cause inflation? Of course not.
Linking ‘deflation’ with ‘GDP’ is an interesting concept and one I haven’t seen explored anywhere before. Can you provide any literature to back up this argument ? Or are you getting confused with ‘deflation OF the GDP?’ A completely different concept?
I agree that quite obviously any institution that has the power to issue currency will increase inflationary pressure by such action surely, as I previously mentioned, the amount of other external factors that exist influencing inflation then it will still occur even within a non-fiat currency?
“Interestingly with deflation the purchasing power of the ten pounds in your pocket actually increases.”
Errrrrr obviously. did you know that if you go outside when it’s raining you will get wet?
“The Policy Council to be suggesting setting an inflation target shows either ignorance or a belief that they have the people fooled. For they may as well suggest a game of pin the tail on the Donkey. Which in a way is really what is being suggested if they are going to try limiting workers pay rises to an inflation target.”
Hey, guess what? I agree with this!
Well done! Have a halfmanhalfbiscuit award point.
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halfmanhalfbuscuit. Thanks, nice to be appreciated.
You said, “Linking ‘deflation’ with ‘GDP’ is an interesting concept and one I haven’t seen explored anywhere before.”
GDP and Money Supply both directly effect the pressure on inflation. Please bare in mind that the following paragraph is simplified and that I understand that a lot of factors have an influence such as there being about eight different categories of money supply, some involving international trade etc.
If GDP remained unchanged and the money supply remained unchanged the inflationary pressure would be zero. As soon as there is a rise in GDP then the money supply has to rise to avoid a negative inflationary pressure (deflation). If the money supply is raised more than is necessary
then this results in positive inflationary pressure. It happens to suit those in charge of money supply to have a small amount of inflation, a bit like a carrot dangled in front of that tailless donkey, it tends to keep the economy on a slow boil, well it would do if the effect is that we are all running around chasing our tails. Another term for the slow boil effect is the ‘rat race’.
I have to differ with you on your other point. You said, “as I previously mentioned, the amount of other external factors that exist influencing inflation then it will still occur even within a non-fiat currency?
Inflation can only exist using an unlimited currency whether fiat or intrinsically valuable, however money with an intrinsic value is usually limited as that is usually what gives it value as in gold and silver. Now for another of my really simplified examples, (are you still there?).
Just imagine houses are brought and sold in gold, there is nothing else that you can buy with gold, and only two houses exist and two ounces of gold. From the above it is obvious that each house will be valued at one ounce of gold. Build another house (raise gdp) now each house is valued at 2/3rds an ounce of gold (deflation).
We have fiat currency because money was removed from the gold standard. Why was this done? Well believe whatever you like. I’m pretty damned sure it wasn’t for my benefit.
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Hey Steve!
Guess what?
I reckon we’re nearly singing from he same hymn sheet us but just using different rhetoric eh?
I know that our ‘money’ was not moved away from being backed by gold for our benefit.
However your simplistic example of money supply VS. inflation actually illustrates my point nicely. I don’t want to deviate away from your simple model too much but it does miss a couple of points. You can’t state in your opening premise that there is a closed system and that the housing stock is limited to two units then have an extra house appear and be built for no cost! (can I have the phone number of your builder?)
So do you accept that labour and commodities etc would have been consumed in the process?
In addition with regard to the Gold itself…… once again I appreciate the simple model but more gold CAN be found, it is the scarcity, danger and difficulty in mining that bestow on it a high value. However there IS always more out there.
Your statement:-
“Inflation can only exist using an unlimited currency whether fiat or intrinsically valuable, however money with an intrinsic value is usually limited”
Is actually a paradox, please read it again.
I’m also still not going to be convinced by your automatic connection between GDP and inflation unless you can provide reputable sources and examples.
To surmise, we should probably go for a beer!
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