Tuesday, August 29, 2006
Iron chancellor says 2% and no more
Posted by David Smith at 07:00 PM
Category: Thoughts and responses

Gordon Brown, writing in the FT, has reaffirmed his commitment to a 2% ceiling for public sector pay (note that public sector earnings, including drift, will rise by considerably more than this). He's also spoken out against unfunded tax cuts - a dig at both Stephen Byers and George Osborne - and warned of tougher times ahead as the world economy enters a period of uncertainty. Code, I think, for stick with me when things are difficult. Getting public sector workers to settle for 2% looks like the biggest challenge.


Wow - he's going to have to work pretty hard to keep inflation under control then, otherwise the public sector will just give themselves bigger pay rises. I smell more IR hikes on the horizon...

Posted by: Jaimeen at August 30, 2006 06:15 AM

Gordon is worried about the upside inflation risk.

Can he manage to keep public sector wage inflation to 2%? This would amount to a pay cut in real terms, though I'm sure a number of people don't realise this.

The Polish immigrants would appear to be Gordon's allies. They should dampen down some of the wage pressure.

Interesting to note that Gordon also gave the MPC a pat on the back in regards to the recent rate hike. Is Gordon, I wonder, expecting any more?

Posted by: Werewolves at August 30, 2006 09:59 AM

I know the MPC doesn't target house price inflation but the latest Nationwide figures suggest that isn't yet slowing. And if house prices continue to creep upward that will add to inflationary pressures as rents and mortgages go up and as people charge more for goods and services to keep pace with the wider cost of living - plus I'm assuming that continued price rises will fuel further consumer spending.

I appreciate that the MPC will probably want to wait and see but 5.25% by January doesn't seem all that unlikely and if there's any further pressure from energy costs and / or wages / commodity prices in the Far East then 5.25% could start to look conservative by the middle of next year.

Mr Smith be a decent fellow and shoot me down in flames

Posted by: Jonathan at September 1, 2006 04:08 AM

5.25% Jonathan is not outside the realms of reality. I suspect we may be at 5% by the new year. But who knows?

The ECB are looking like they will raise rates again, the FED may possibly slip another one in.

Posted by: Werewolves at September 1, 2006 08:35 AM

Most City economists certainly expect a rate rise - to 5% - in November. The Nationwide figures won't have reflected the rate rise, or even the expectation of one. That's true of other recent data, for example the July mortgage approvals. On the other hand, the latest GfK consumer confidence measure suggests people are gloomier than at any time since the start of the year. That's the key, I think. If consumer spending maintains its second quarter strength the MPC will feel obliged to nip it in the bud, fearing the inflationary consequences.

Posted by: David Smith at September 1, 2006 10:06 AM