The Inflation Bubble
A UK central banker has warned that inflation could rise to four per cent before the end of the year.
Bank of England governor Mervyn King said higher food and energy costs might cause a rapid increase in the inflation rate.
So what will a world be like with inflation near four per cent?
At four per cent the central bank will be forced to play its hand and raise interest rates, not because of strong demand overheating the economy, but because of the cost increasing as supply is strained.
This is a whole new ball game for the central bank and rising interest rates will achieve minimal results for maximum pain to the consumer.
Interest rate rises will be necessary.
But the pain will give momentum to the cry that these rises are based on a flawed model and other, more radical, action was needed.
Some may even suggest price fixing to curb inflation but this is an extreme reaction and will only be considered if inflation starts pushing double figures.
Rest assured that double-figure inflation is unlike; almost impossible as spending has already slowed which has relieved some of the pressure on the supply side of that most basic economic equation.
The concern remains that the UK, along with the global economy, is facing inflationary pressure from ‘necessities’ and demand can only reduce so much before it levels out.
It is any wonder analysts are closely monitoring the commodities markets as any further price increase could just be the catalyst needed to push us over the economic edge we have been dancing with for so long.
