Inflation: get used to it

Alistair Darling says rising inflation will mean a tough year for everyone - and there's not much he can do about it...

Last Updated: 31 Aug 2010

Speaking on Radio 4’s Today programme this morning, Chancellor Darling admitted that ‘there is no doubt our economy is slowing down’, and warned of ‘a difficult year ahead’ as fuel and food prices continue to spiral upwards. And unfortunately, we're going to have to get used to it, according to Bank of England Governor Mervyn King - he said yesterday that inflation will hit 4% later this year. And if the Bank’s Monetary Policy Committee hikes interest rates to try and calm things down, it might turn our current slowdown into a full-blown recession.

So it’s perhaps no surprise that the MPC voted 8-1 in favour of holding rates last month, according to the minutes released today, with only arch-dove David Blanchflower (as usual) voting for a cut. Still, as inflation keeps climbing, the temptation is likely to grow: the minutes show that some members considered voting for a hike last time round – as time goes by, it’s likely that some might start voting for it (although it’s unlikely there will be enough to force a change).

The good news is that King thinks the current high is only temporary (albeit he thinks it won’t stabilise until well into 2009), since it’s resulted from one-off jump in fuel and food prices. And to please glass-half-full types further, he also pointed out that these hikes are not feeding through into the economy more generally, as they did back in the 1970s when the oil price was going through the roof.

That said – one of the cornerstones of his argument was that the big price rises in fuel and food haven’t yet translated into higher wage settlements (which is helping to keep a lid on inflation). And Darling was banging a similar drum on the Today programme this morning, arguing that workers had to be sensible with their pay demands. ‘We have got to be vigilant in relation to all pay settlements, public and private,’ he told the BBC. ‘If we get back into that spiral, it will take years to get out of it.’

So the chances are that both men will have been a bit twitchy about this morning’s news that the striking tanker drivers appear to have reached a pretty generous pay settlement with their bosses. Nobody seems to know exactly what they’ve got, but given that they were demanding an inflation-busting 13% hike and the unions seem mad keen to accept this latest offer, it seems likely that they’ve got something at least in that vicinity. (It was certainly enough to provoke Business Secretary John Hutton into calling for restraint, which probably isn’t a good sign.)

Since the exact figure will presumably leak out at some point today, the Treasury and the Bank will be hoping this doesn't start a trend...

(UPDATE: the increase is apparently 14% over two years - no wonder UNITE was pleased)

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