Belt up, inflation is sitting on the runway and is about to take off. According to a recent IDS survey of wage settlements, private sector pay increases are running at an average of 4 percent. Today's wage settlements are tomorrow's price increases.Normally, this news should send the MPC into a panic. Some substantial interest increases would follow. However, these are not normal times. The UK banking sector is in trouble and the Bank of England have decided that some substantial interest rate reductions would be preferable.
However, inflation isn't going away anytime soon. The MPC should think long and hard about any future interest rate reductions. Saving a couple of cash strapped banks could generate more serious problems down the road.
2 comments:
AA: "Today's wage settlements are tomorrow's price increases."
Nope! Todays wage settlements are a reflection of yesterdays money supply inflation.
Who controls the money supply? Why Governments.
The US FED has since the '70s been engaged on the most unprecedented inflationary program in history.
All the rest of the governments have followed suit, either willingly or grudgingly.
Anon.
Currently they have to follow.
The west in general is as indebted as the US.
In order to stay alive, they have to deflate their currencies compared to international baskets, to maintain parity (more or less) with the US.
If the US cuts, the UK will.
Yes there will be asset inflation in US or UK price terms, mainly gold and other precious metals, and food.
Oil will not necessarily follow, depending on reduction in global demand caused by upcoming recession.
The problem is really, as far as the banks are concerned, one of solvency, but all the central banks can do is provide liquidity.
Until banks can assemble accurate balance sheets to determine assets,(and they can't because of opaque paper), they can't assess their lending abilities. Hence mortgage lending will be more strict, and restricted, etc, housing prices will fall.
There are many dominoes yet to topple, - it won't be pretty.
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