Up, up and away! Inflation takes off …

Inflation in the UK is now running at 3.7% according to figures released this week.  And while that is higher than pretty much any other European country, the trend is up everywhere; Eurozone inflation hit 2.2% this month, a lot better than the UK performance, but still above the target. .

So is this a bad thing? As an individual, would you rather have inflation at this level and no salary increase? Or have no inflation and see your salary be cut by 4%? Psychologically, most people would go for the salary freeze and 4% inflation. So if we have to become poorer as a nation (as we've been living beyond our means) then maybe this is the least painful way of achieving that? And of course, the Government's current cumulative debt of just over £1 Trillion gets effectively 3.7% less onerous year on year.

Those facts lead me to the view that the UK Government is not actually, deep down, too worried by inflation at this level, as long as it doesn’t go too much higher, whatever they say (and of course they have to make concerned noises to placate the markets).

So that leads us to the conclusion that inflation ain't going away. And, to be fair to Governments, there is a good case against raising interest rates at the moment in the UK and other European countries. The argument goes that inflation is being driven from economic growth in developing countries, and the subsequent commodity price and wage rises.  If they are the causes, small interest rate increases in Europe will do nothing about it anyway, and may threaten the fragile economic recovery (demonstrated by the disappointing unemployment figures today in the UK).

Whatever the driver for inflation, we are going to have to cope with it for 2011 and probably beyond. In our personal lives, that means for many of us looking to cope with higher prices without in all probability higher wages to compensate. And in our working lives, it means coping with suppliers wandering into our office and asking – apologetically or confidently – for a significant price increase.

We’ll take a look therefore at how we can counter at least those professional demands next week.

Voices (2)

  1. Peter Smith:

    Of course – good point. And another asset price bubble is following QE; the one case of top Claret that I possess has doubled in value in the last 12 months! (Doesn’t make up for my cash savings making about 1.5% interest while inflation runs at 4 % though…)

  2. Christine Morton:

    I’m surprised you haven’t mentioned the increase in the money supply, i.e. quantitative easing! This is a deliberate strategy by the US and UK governments to lower their debt overall, and is a direct cause of inflation.

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