Thursday, April 21, 2011

Stagnant Wages Delay Interest Rate Rises

One of the key issues this year has been the extent to which we should be concerned about the headline rise in inflation. CPI is at 4%, almost double the inflation target, RPI is higher. In nearly any other circumstance, this would be good reason to increase interest rates (especially when they are near rock-bottom). However, the MPC has felt other factors mean that interest rates should be put on hold, perhaps delayed until November now.

In particular a key statistic is wage growth. If wage growth takes off, this tends to cause inflation because of - higher demand pull inflation and higher cost push inflation. However, the UK is not experiencing wage inflation. As many people know we are seeing living standards squeezed by high inflation and low wage growth. Falling real wages

The MPC approach is in stark contrast to the ECB. Despite lower inflation in the Eurozone, the ECB have already stated they expect interest rates to increase in response to the rise in temporary inflation.

Amidst all the concern over inflation, I was pleased to see the OECD make a warning over a potential lost generation of unemployed workers. The ECB would benefit from weighing up costs of unemployment when worrying about a temporary blip in inflation.

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