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Wednesday, April 2, 2008

How much of a problem is world inflation?

In the current economic climate The Governor of the Bank of England believes the threat of inflation is a higher priority than the meltdown in the financial sector.

The Bank has recently dampened down expectations of an interest rate cut based on world inflation pressures and concerns that this could translate into spiralling wage costs.

Wage inflation does need to be watched closely as there is usually a time lag from higher goods price inflation feeding into wages and other costs.

The risk facing the world economy is that central banks will accommodate any rise in world inflation as this could lead to stagflation. For example in China inflation has now reached 7%. This is a far cry from the UK governments 2% target and will quickly affect imported costs around the world.

In light of this a reduction in interest rates next week by the Monetary Policy Committee (MPC) would be extremely welcome but is now looking less and less likely.

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