Thursday, 4 November 2010

Return of Inflation

Simon Ward has indicated that inflation is set to increase over the next year, finally starting to ebb away in 2012.

This will, no doubt, be leapt upon by Labour as evidence of a double-dip recession, and put pressure on the Bank of England to raise interest rates from their current record low of 0.5%.

However, I don't think they will.

Given the recent Comprehensive Spending Review actually commits to an increase in public spending in cash terms over the course of this Parliament, George Osborne will be relying on inflation to reduce the deficit, not cold, hard reductions in expenditure. So I don't think the Bank of England will be under any Government pressure to raise interest rates any time soon.

The Government is hoping that inflation will rise faster than their spending commitments - in fact, they are counting on it. The success of the Comprehensive Spending Review depends on it.

Inflation is here to stay, at least for a while.