Inflation and the economic slow-down

Tuesday, 13th May 2008 12:41 - by Resident IFA

Is there any good economic news out there? It would seem not. I always view the glass as half-full, but this climate is even testing my sunny disposition. The Consumer Prices Index (CPI) rose to 3%, year-on-year, it was announced today. This is a 0.5% rise from last month...pretty colossal in inflationary terms. The Retail Prices Index (RPI – the ‘basket of goods’ measure) also rose by 0.4% on the month, to 4.2%. Put simply, those producing goods have recently felt the increase in utilities costs (gas and electricity) and have passed it on to the consumer in terms of price increases. This, in turn, creates a ‘sticky wicket’ scenario for the Governor of the Bank of England, having to justify to the Chancellor of the Exchequer why the Bank has just lowered interest rates amidst an environment of rampant inflation. As a general rule, when costs are rising, the cost of borrowing, and thus expenditure, can be kept under control somewhat by increasing interest rates to slow the supply of money i.e. borrowing is less attractive – from the Monetarist school of economic thought. Before I lose myself in Economic theory, I will call this blog to a halt! I am genuinely interested in where you think the economy is heading...hyperinflation (spiralling price increases), stagflation (rising prices and rising unemployment)...or something a bit more cheerful! Please feel free to use the comments box below or start a new thread in our brand new General Chat area of lse.co.uk. Until next time...