RE: What's driving inflation.3 Nov 2022 22:33
QE - other have already explained what this is, hope to expand on that. So when the 2008 financial crisis occurred, to stimulate economy again major economies reduced the interest rate. US did several cuts over 2008 from 4.75% to 0%, this still didnt get the economy up and running. QE came in as a last resort as no more room for interest rate cuts unless you wanted a negative interest rates. So the central banks bought gilts/treasury bills from banks and other financial institutions such as insurance companies and pension funds, expecting the liquidity and cheap money would make the public spend and kickstart the economy. What actually happened, these institutions used these cash and buying up other assets such as equities, corporate bonds, especially of US companies rather than UK and driving their prices up. So when you say where is this printed money its in equities with very lofty valuations like apple and tesla (fuelled by low gilt yields to value the equities) and cheap mortgages. It was handled very badly now we feel the pinch when stocks are nose diving and mortgages feel very unaffordable even though the rates are not as high pre 2007. We should've done QT much earlier on, like 2016, can understand UK not doing it due to brexit concerns, but nor did USA and there economy was in good shape, with trumps tax cuts ballooned the US stock market even further.
Last week on CNBC, they did say that people made so much money on stock markets in USA that despite rising rates and inflation they keep on spending and jobs opening are still high.
Then we move onto inflation, usually its either cost push (energy prices, supply chain issues, food import prices and imports more expensive, especially for UK due to unfavourable FX) or demand pull (money made on stocks as described above, especially US stocks, unemployment still low so disposable money still coming in especially in US, and wage increases covering more than the rise in prices - RR today announced they increased wages by 6.5% for their staff) and what we currently seeing is due to both making the situation far worse. Alot of people are saving money by working from home still like me who spent 5k on petrol pre covid for 60m round trip to work every day), now i dont and my energy prices are nowhere close to 5k, although doesnt hold true who work in shops, factories but then the distance travelled is not much usually for these workers.
In all its a convoluted mess we are in, mostly driven by Putin and our central banks acting too late making increase in rates faster now and causing a sudden shock to everyones finances - shouldve been done 4 years ago gradually and prob only upto 3%.
Sign In
Follow the stocks
