This is the week the Fed chooses the rate of interest for another month. The odds are that there will be a rise this week, followed by another rise at the next meeting. It was all different a few months ago, when the pundits were saying rates should have peaked by now. It’s been these fears over the rate of interest that have largely been behind the recent market turmoil. And now, as if it wasn’t something we needed like a hole in the head, the Bank of International Settlements (BIS) has warned that inflation pressures are building.
It also seemed to put its finger on a problem that has been plaguing producers of economic text books. In recent years governments have followed precisely the policies that in the past have led to inflation. However, this time, prices have stayed low. We all know the reasons: the Internet promoting price competition and cheap Chinese imports. But, warns the BIS, this has masked the real problem, and as a result we are now likely to pay the price.
But, maybe it’s not time to panic yet. Recently we reported how the first quarter of this year saw four times more days lost to industrial action over pay disputes than in the whole of 2005. But, according to the Industrial Relations Services, pay increases have averaged just 3 percent of late, and only a quarter of pay rises were bigger than a year ago, whereas 50 percent were lower.
Writing in the Telegraph on Sunday, acclaimed economist and head honcho of Capital Economics, Roger Bootle, argued that fears China will move up the value chain and thus lead to higher prices are overdone.
Firstly, he argued that as China moves upmarket, we will still see cheap imports from behind the Great Wall, it’s just that the products will be at a different level on the value chain. Secondly, he argued there are plenty of countries to replace China as a supplier of goods available at rock bottom prices.
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