Pay squeeze set to continue
The governor of the Bank of England has warned that workers will have to put up with rising inflation and should expect the squeeze on their take home pay to continue.
Speaking in Newcastle, Mervyn King said that continued high inflation was unavoidable as the economy adjusts to rising commodity prices and suggested that inflation was likely to hit 4% or 5% in the coming months. He also inferred that the Bank of England would have to hamper attempts from wage setters to keep up with rising prices.
He said: "Further rises in world commodity and energy prices cannot be ruled out. Attempts to resist their implications for real take home pay by pushing up wages would require a response [from the MPC which sets interest rates]."
King also noted that the combined effects of stagnant wages and high inflation had resulted in the longest decline in the real value of our wages sinces the 1920s. However he insisted that this was inevitable and could not be helped by bank intervention.
Had the bank stepped in to combat rising prices by increasing interest rates wages would have fallen as a result and we would still all be suffering a similar loss of spending power, he explained: "Monetary policy can affect the inflation rate at which these adjustments take place. But it cannot alter the fact that, one way or another, the squeeze in living standards is the inevitable price to pay for the financial crisis and subsequent rebalancing of the world and UK economies."
King's speech was made following the announcement that the UK's GDP had shrunk by 0.5% in the last three months of 2010, once again raising the threat of a double-dip recession.
The news may reduce pressure on the MPC to start raising interest rates. Earlier this month two members of the committee voted to raise interest rates from their current low of 0.5%.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
The total money value of all the finished goods and services produced in an economy in one year. It includes all consumer and government consumption, government spending and borrowing, investments and exports (minus imports) and is taken as a guide to a nation’s economic health and financial well being. However, some economists feel GDP is inaccurate because it fails to measure the changes in a nation's standard of living, unpaid labour, savings and inflationary price changes (such as housing booms and stockmarket increases).
A term applied to raw materials (gold, oil) and foodstuffs (wheat, pork bellies) traded on exchanges throughout the world. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed price on a specific date. Because commodity prices are volatile, investing in futures is certainly not for the casual investor.