Higher inflation should be feared, even if it proves to be short-lived
Opinion is divided over whether the latest spike in inflation is a blip or a more worrying long-term problem.
Mervyn King's letter to the Chancellor says he is confident of bringing price rises back within the Bank of England's target range relatively quickly — and some of the January increase is accounted for by obviously one-off factors, such as the return to the full rate of VAT.
The counter-argument is that as the world economy moves into recovery, we will see rising demand for commodities — oil is a big part of the inflation story — and that may mean price rises do not come down as quickly as most people expect.
However, even if you accept the blip theory without question, the January spike can still cause problems. In particular, we are coming up to peak season for wage rounds in both the public and private sectors.
A trade union research group warned last week that the number of employers looking for staff to accept a pay freeze will increase in 2010, despite the recession officially having come to an end.
That could put employers on a collision course with staff. It was easier to sell a pay freeze last year, with the recession in full flow and inflation — on the retail price index measure — negative during some periods.
This year, despite ongoing cost pressures on employers, many staff will not be so easily deterred from pushing for a salary increase. With inflation at its current levels, not getting a bit more will leave people feeling worse off — and the tax rises to come will compound that feeling.
The result may be more industrial relations disputes and, in the current economic environment, that could be particularly difficult.
We get the latest unemployment numbers today. But whether or not last month's unexpected fall is repeated, it is clear that joblessness has risen much less quickly than one would have expected given the prolonged nature of the recession. The chief reason for that seems to have been the healthy arrangements many employers and employees have come to — with short-time working, pay freezes and other flexible deals preferred, wherever possible, to redundancies.
However, if this contract is about to break down, as workers demand compensation for the rising prices they face, many employers may feel they have no option but to step up redundancy programmes. Most economists already expect unemployment to rise a little further before peaking, but job losses may yet rise to the levels originally predicted during the slowdown.
Higher inflation is to be feared, in other words, even if it proves to be short-lived.
So how much extra cash can Alistair Darling count on from the super-tax on banking bonuses as he prepares next month's pre-election Budget? And should the fact that he is on target to raise much more than was originally envisaged (remember, the Chancellor told us the tax would raise £550m) be regarded as good news or bad?
Barclays alone is contributing half that sum to the Exchequer, yesterday's results reveal. Others, notably Goldman Sachs, have also said they will be paying out another couple of hundred million. The total take for the tax could be as much as £3bn — almost six times the original forecast.
Mr Darling's publicly-stated motivation in introducing the bonus tax was to put the banks off handing large payouts to their staff. He seems to have failed in that objective. Still, given the state of the public finances, there are some compensations in taking six times as much tax as you expected.
Note too, that all the talk of the tax putting bankers off working in Britain seems to have dissipated. Even though his policy hasn't worked out quite as expected, Mr Darling seems to have got away with it.
Asthis paper reported yesterday, credit card rates have hit a 12-year high. If you want to know why, look no further than the results of Barclays Bank. At its Barclaycard division, bad debts rose from £1.1bn to £1.8bn last year. That has to be paid for somehow and higher credit card rates are one answer.
Still, despite the headline numbers on impairments — overall, Barclays reported a 49% hike in its bad debt charge to a shocking £8bn — what is really remarkable is that in many areas the bank thinks the worst is behind it. Barclaycard's second half was better than the first, for example — a trend seen in many parts of the bank's lending activities.
Indeed, Barclays expects overall impairments for 2010 to be modestly below 2009, and it says bad debt has peaked below the highs seen during the recession of the early 1990s. If that forecast proves correct, it will be quite an achievement given the severity of the global downturn through which we have been.
No wonder bank shares headed the FTSE 100 leaderboard last night. The read-across to rivals such as Royal Bank of Scotland and, in particular, Lloyds (which has all those disastrous HBOS commercial loans sitting on its books) is encouraging.