We are in a low inflation cycle that looks set to last a long time. Sounds great – except it means no pay rises and businesses have little chance of increasing prices, so their margins are fixed. Fixed margins means no new machinery investment means no productivity gains means no ability to fight or outwit competition from *wherever*.
Once upon a time, higher inflation meant prospects of pay rises, spending and the raison d’etre to invest in building the business to meet increased demand and competition.
Now, turning to housing, the rising prices (Some say bubble) will not be mitigated by pay increases over time. A colleague, when I first started work, bragged of paying $1 a month mortgage. So the burden felt now will not lessen over time, it will remain this oppressive for the duration of the mortgage. Not so smug about being a property owner now.
So, we’ve lost the reason to increase prices due to labour and materials price rises and people are more cautious about the entire concept of borrowing as their prospects aren’t stunning.
If banks raise their lending rates, they have repayment issues (or rather, the mugs who bought the securitised loans will sue for mis representation). Payments need to relate to income, so where do the next wave of ever increasing bank profits come from?
We all wanted low inflation when it was high and we all want ever increasing house prices to make us feel (artificially) rich. Oh, and a pay rise too.
Well, low inflation is here to stay. Pay rises are consigned to the stuff of legends. Why should house prices rise when nothing else is?
Yes – “Well , here’s another nice mess you’ve gotten me into !”