Friday, 5 February 2010

Inflation lurks as QE ends

The Office of National Statistics has just published it's January Statistical Bulletin. (Here, if you're interested.)

Consider the following phrase from the report:
The input price index for materials and fuels purchased by manufacturing industry rose 8.4 percent in the year to January.

If input prices are going up at 8.4 percent a year, how long before output prices, ie the prices in the shops, are doing the same? The first must feed through to the second in fairly short order. Of course, the cost of goods is more than just the cost of material and fuel - there are wages, rents, taxes and such to pay. But it's not like rents and taxes are going down. There is some scope for reducing the wage bill. Everyday seems to bring more mass-layoffs. However most of the rise in input prices is coming our way shortly.

The Bank of England has said it will not QE anymore for now. That's good, but frankly it looks like it really needs to be tightening monetary policy. Yesterday's interest rate decision was: hold at 0.5%, which doesn't seem to be addressing the issue of incipient inflation.

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