Skip to main content

INFLATION - THE ENEMY OF RECOVERY

There are various reports out today which suggest that inflation could rise further than expected when figures are released later this week.

Although the Bank of England has already acknowledged that inflation was likely to have risen above 3 per cent in January, it was then expected to fall below the 2 per cent target set by the Treasury.

However, others are not so optimistic.

For example, Investec predicts a 4.2 per cent inflation rate for January, more than double the 2 per cent target, due to the rise in VAT to 17.5%, higher petrol prices and the impact of the snow on food prices.

Citigroup has also predicted that inflation would be close to 4 per cent even at the end of the year, compared with the Bank’s forecast of close to 1 per cent.

Whilst the IMF has suggested that governments should allow for higher inflation in the future, this is the last thing any economy needs as it tries to recover from a recession, especially one in which the current Government has created unprecedented levels of public debt.

Whilst higher prices could lead to yet another blow to consumer confidence, there is another problem for any incoming government if inflation continues to remain high throughout the year.

At a time of economic austerity when there are expected to be massive cutbacks in public sector expenditure, a higher rate of inflation will lead to higher pay demands from public sector workers whose pay settlements, unlike those in the private sector, are normally linked directly to the rate of inflation. It will also lead to pressure to increase pensions, social security and other areas of expenditure which directly affect the general public.

Therefore, the next Government will not only have the issue of reducing the current deficit, but may well have to deal with increasing pressures on further expenditure due to the inability of the Bank of England to keep inflation under control.

Comments

Critic said…
Sunday Times today.....

Leading economists say the government lacks a credible plan to cut Britain’s budget deficit and that action to reduce the country’s borrowing should start immediately after the election. In an endorsement of the Conservatives’ position and an attack on Labour — although the economists insist they are non-partisan — they warn that a failure to act could trigger a loss of confidence that could push up interest rates, undermine the pound and threaten the recovery. Signatories of a letter, published today in The Sunday Times, include the former chief economist of the International Monetary Fund, a former deputy governor of the Bank of England and head of the Financial Services Authority, and a former permanent secretary to the Treasury and cabinet secretary. Britain entered the financial crisis with a big underlying or “structural” budget deficit, the letter adds, which has widened sharply as a result of the recession.
February 14, 2010 9:12 am
Anonymous said…
Looks like quantitive easing worked a little too well!
February 17, 2010 3:01 pm
Post a Comment

Popular posts from this blog

THE IMPORTANCE OF FRANCHISING

When we talk about start-ups and entrepreneurship, rarely do we discuss the potential of franchising not only as a way of establishing new ventures in the economy but also as a method of growing existing businesses. According to the British Franchising Association, franchising is the granting of a licence by one person (the franchisor) to another (the franchisee), which entitles the franchisee to own and operate their own business under the brand, systems and proven business model of the franchisor. The franchisee also receives initial training and ongoing support, comprising all the elements necessary to establish a previously untrained person in the business. This enables individuals to start their own businesses without having to develop their own ideas and utilising an existing brand and established market. Of course, whilst each franchise business is owned and operated by the franchisee, the franchisor controls the quality and standards of the way in which the business is...
Read more

THE IMPORTANCE OF THE CREATIVE CLASSES

One of my favourite academic books of the last two decades must be the “Rise of the Creative Classes” by Professor Richard Florida.  This was one of the first detailed studies of the growing group of individuals who use their creativity and mental labour to earn a living and not only included those in arts and entertainment, but also people working in science and technology as well as knowledge-based professions such as healthcare, law, business, and finance.  Fast forward to 2022 and Professor Florida has written an updated report on the creative classes although he and his team now identify a different type of individual who is taking full advantage of the growth in digital platforms, social media, and online marketplaces.  Such ‘creators’ are defined as those who use digital technology to make and publish unique creative content, whether in the form of video, film, art, music, design, text, games, or any other media that audiences can access and respond to.  They ...
Read more

INTRAPRENEURSHIP

Whilst we often consider entrepreneurship to be associated predominantly with new start-ups, larger firms - in order to compete effectively in fast-changing global markets - are adopting more innovative and enterprising approaches to management within their organisations. One of these approaches is the development of entrepreneurship within a corporate environment (or intrapreneurship). Research has shown that intrapreneurship is not easy, and there are considerable differences between an intrapreneurial and a traditional corporate culture, with the latter having an emphasis on a culture and reward system that tends to favour caution in decision-making. For example, large businesses rarely operate on a "gut-feeling" for the market-place, as many entrepreneurs do. Instead, large amounts of data are gathered before any major business decision is made, not only for use in rational business decisions, but also for use as justification if the decision does not produce optimu...
Read more