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Inflation & interest rates - Oh, what a clever ploy RBA!

Discussion in 'Finance & Banking' started by Billv, 23rd May, 2008.

  1. Billv

    Billv Getting there

    Joined:
    15th Jul, 2007
    Posts:
    1,796
    Location:
    Sydney, NSW
    By Michael X

    Can someone please explain how increasing interest rates can reduce inflation, when a rise in interest rates is inflationary by itself!

    For example: Interest rates go up, the cost of fuel goes up, transport costs go up, the cost of producing goods go up, Retail prices go up, Inflation goes up!

    HELLO, am I missing something here?

    Surely some smart person can work out how we can reduce inflation without adding to the problem.

    The whole article is found here:

    Inflation & interest rates - please explain!
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I think you'll find it's more about credit than about prices. If people can get money cheaply, they will spend more and drive up demand. It is demand that drives up prices.

    ... and there is no direct correlation between interest rates and the cost of fuel or transport.
     
  3. Billv

    Billv Getting there

    Joined:
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    Location:
    Sydney, NSW
    Sim

    Yes, it's strange that he makes a note of it without explaining how he came to that conclusion.
    My thought would be that petrol station operators would have business loans
    and their operating costs are increasing so they would be more keen to put up petrol prices.
    Ofcource competition should be limiting this practice but it seems to me that today, oil companies + petrol stations are working together and are all going for the money so competition is long gone.
    In the old days we had cheaper fuel on Mondays and Tuesdays
    and on Wed/Thur they would put up the petrol price by up to 10 cents higher.
    Now they got really greedy and on Wednesdays they are putting up the price by 20 cents/litre.

    Cheers
     
  4. AsxBroker

    AsxBroker Well-Known Member

    Joined:
    8th Sep, 2007
    Posts:
    1,448
    Location:
    Sydney, NSW
    Poor Michael X,

    Yes, he is missing something...

    Raising interest rates is literally raising the cost of borrowing, if it becomes more expensive to borrow, less people will borrow and demand will decrease.

    If demand decreases prices will (over time) steady. If demand is high and there is limited supply, prices will increase (Supply and demand - Wikipedia, the free encyclopedia).

    Yes, many people don't feel superannuation is 100% safe bet for their retirement.

    Mainly because they don't understand it. Superannuation and pensions are purely a tax structure, the trustee will let you invest in most assets that will provide you with money for your retirement (except for the yacht and ferrari you want to drive until you retire). Whether it's cash, term deposits, Aussie shares, international shares, direct property, listed property, etc, it's better off in superannuation/pensions due to the favourable tax treatments.

    Yes Michael, you can have your direct property investment in your SMSF, why would you want to pay tax on the Capital Gain when you sell it? If you do it right, you can pay 0% tax on the growth!

    Cheers,

    Dan

    PS Before making an investment decision speak to your FPA registered Financial Planner.