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FTBagain

Inflation Two Interesting Articles

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The first artical is form Reuters, in the news blog.

http://today.reuters.co.uk/news/newsArticl...&archived=False

In this it points out that the second phase of rising inflation is rising wage claims. Wages are usually calculated against the RPI, which has stayed relatively flat, as the CPI has started to rise. This gives the policy makes a get out clause at the moment because it allows them to claim that the current rising inflation is a short term spike.

The second story is about the Hienz workers in Manchester.

http://newsvote.bbc.co.uk/1/hi/england/man...ter/4349722.stm

They have managed to tie their pay rise to inflation +0.25% for next year on top of a 4% rise this year. It seems that the unions do not share the MPC's confidence in the path of inflation.

Whilst most commentators, especially those pressing for a rate cut, will be watching the CPI rate, keep an eye on the RPI. If that starts to rise then it is game over for the MPC. Medium term inflation will be well and truely established.

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See my post yesterday on worldwide inflation. I mentioned the Heinz story and this link to expected worldwide pay increases by country for next year measured against likely reported inflation. This is an eye opener and shows that irrespective of oil etc inflationary pressure is there and will not go away.

"Even more significantly, see the link to the 2006 Worldwide Pay Survey from Mercer Group from early October. Check out some of the figures in the table of expected wage increases around the world against expected inflation rates...If this is not a leading indicator then I'll be...

http://www.prnewswire.com/cgi-bin/stories....04158111&EDATE=

Edited by Tempest

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Tempest,

Thanks, I did read your post yesterday, hence my comment about 'global inflation', well researched I though. I should have linked to it, appologies.

Your link above did not work.

Edited by FTBagain

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Tempest,

Thanks, I did read your post yesterday, hence my comment about 'global inflation', well researched I though. I should have linked to it, appologies.

Your link above did not work.

Fixed link now - thanks. Great minds etc.

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Fixed link now - thanks. Great minds etc.

:D

Nice article. It does suggest some inflationary pressure, but the wage hikes do not appear to be very strong. Whilst I have not seen the data so well laid out before (good find by the way) from reading headlines of UK inflation / wages, it looks pretty much like business as usual. The possible exceptions being India and China. I know these are only forecasts, but I suspect we need a bit more of a push from oil / commodities before the masses start really pushing for higher wages. We have not yet reached the pain barrier.

Having said all that UK inflation is rising at a nice steady 0.1% per month. Still 5 months from letter writing time for Merv, but such a steady rise does suggest something fundemental is happening. We have seen some militancy just lately, but they have been isolated cases so far. May be we are getting close to the pain barrier, but not quite there yet?

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inflation rose today to the highest level in 8 years.

Yup! But my reading of the situation is that the MPC is sitting on its hands hoping that this is a short term issue. Hence the public debate between the doves and hawks. So long as the CPI rise slowly they can afford to wait and see. If it rises quickly they will have to act.

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The MPC can wait if the increases are slow I agree - but when do they act? If CPI increases to 2.8/2.9% in the next couple of months what do they do? Wait and see further? Or if CPI stays in a 2.5-2.9% range for the next 6-12 months what do they do? When does a slow rise demand action? Before or after the threshold is breached?

Picture the 3% threshold being breached and the letter from Mervyn to Gordon: "Dear GB, CPI has reached 3%. I am writing to tell you that the MPC have not taken any action (nor do we plan to do so in the short term) to curb this inflation as we think it short lived and energy related and we are confident that these oil prices increases are temporary and CPI will fall back to target in 2 years." Mervyn would need balls of steel to say that and would not IMO as it would risk detroying the credibility of the entire MPC if this was wrong. Far more likely is a letter saying "CPI has reached 3% and we have taken the step last month to increase rates by 0.25% to curb the inflationary pressure in a managed way without unduly affecting growth. The MPC feels the downside risk of such action to UKPLC is outweighed by the need to ensure inflation remains under control and on a path to meet YOUR 2% target".

Put your self in the MPC position. Would you (dove or hawk) wish to be associated with a track record which failed to deliver?

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Tempest,

My point was really based on todays conditions. At 2.4% if CPI had jumbed to 2.7 - 2.8% as widely forecast then a 0.25% rise in IR before Xmas would have looked far more likely, because the doubt would have been sown that the rate of increase in inflation was accelerating raising the possibility that the CPI would have breached the 3% ceiling next month.

Under those circumstance the pressure at act at the next MPC meeting would have been very real, as your second letter scenario implies (liked them by the way :D ). However, as it is the MPC could feel that they have at least 5 months before the 3% ceiling is breached. Now depending on other economic data they will have to act sooner or later in that 5 month time frame assuming a steady rise in inflation rate of 0.1% per month.

I was really hoping for a 2.8% rise. I did not think it would happen, but I had my fingers crossed. As it is, New Year before rates start going up again IMO.

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  • 301 Brexit, House prices and Summer 2020

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