Inflation, inflation

A warning of tough times ahead was made loud and clear last night when the Governor of the Bank of England, Mervyn King, and Chancellor of the Exchequer, Alistair Darling, spoke to bankers and merchants last night at the Lord Mayor’s dinner. The speeches delivered at this important annual event in the financial calendar, held at Mansion House, left little room for cheer. The headline in the Financial Times today sombrely read, “King and Darling issue bleak forecast”.

King and Darling explained that the country had to brace itself for the harsh realities of below-inflation pay rises, more expense mortgages, as well as rising fuel and food prices. Mr. King did not try to soften his words and clearly stated that Britain was facing “the most difficult economic challenge for two decades.”

In their speeches, they both talked about how families in the UK needed to prepare themselves for a tight squeeze on real income. In fact, getting tough on inflation was the main resounding theme of their discourse. Inflation has jumped to 3.3 % in the UK, its highest level since 1992, and is likely to reach 4% in the coming months. The Governor and the Chancellor warned against excessive pay rises, arguing that inflation pay settlements would have disastrous results, leading to years of economic hardship.

The Government may be right to say that everyone has to ‘tighten their belts’, but they certainly will have a hard time dealing with public sector workers in the coming weeks. Union workers are not happy about the prospect of accepting below-inflation pay rises and believe they are the ones who have been hardest hit. Can the Government cope with the prospect of strikes at this time? Some tough decisions will have to be made about whether some concessions are merited.