Belfast Telegraph

Viewpoint: More Inflation pain to come

It did not take a letter from Bank of England Governor, Mervyn King, to the Chancellor of the Exchequer warning that inflation has reached a 10 year high to alert the ordinary person in the street to the fact that prices are soaring.

Householders have seen many of their staple commodities take a steep upward hike in recent months.

Petrol and diesel prices are at their highest, gas and electricity charges have soared by almost a third and a fifth respectively, foodstuffs are costing more and rates bills are ever steepening.

What Mr King's letter to Alistair Darling does reveal is that there is no end to the pain in sight.

In his letter the Governor warns that inflation could increase at an ever quickening pace to more than 4% by the end of this year — a full 2% above the government's target rate — and that it could be two years before it settles back to the target level. That, of course, depends on there being no further external shocks to the economy.

Most of the inflationary pressure is due to global factors, particularly the balance between demand and supply of food and energy.

Oil prices have nearly doubled in the past year, reaching a new high of almost $140 a barrel in New York at the start of this week. Some pessimists forecast that it could yet rise to $200 a barrel, at which stage the current pain would seem like a minor ache.

As things stand, these are bleak enough times for both households and industry. The Bank of England's favoured way of tackling inflation is through strict control of interest rates and, given the Governor's economic forecast, it seems certain that rates will continue at their present level or may even increase.

That means even more expensive borrowing, which is bad news for home buyers and for companies seeking to invest or to service existing debt.

The Government will also seek to control wage increases. High wage demands will only fuel inflation and set in motion a very undesirable spiral of increases. That is unpalatable news for householders seeking to pay their increasing bills. And it will hit householders in Northern Ireland hardest of all.

Historically, in spite of the lowest pay rates in the UK, local householders had higher disposable income because of low housing costs. The house price boom of recent years has eaten into the disposable incomes of many young people and they are having to tighten their belts most.

The new Executive will be unable to do much to alleviate what is essentially a problem caused by global pressures, but voters, nevertheless, will want to see Ministers take some account of their plight.

They will expect departments to be run efficiently and the reform of local government expedited to ensure that taxpayers' money is spent wisely. They will also expect MLAs to keep their own salaries and expenses in check and further action to alleviate water charges and rates bills next year would also be a welcome development.

Belfast Telegraph


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