Three short items:
First, Bloomberg reports on signs that wages may be accelerating. It’s worth bearing in mind that we’re talking about modest stuff — if the employment cost index accelerates to 2 percent, that’s still just productivity growth, and hardly a sign of runaway inflation. Still, this isn’t what I expected to see, and I will be watching developments.
Second, Adam Posen of the Bank of England explains why the BoE should not raise rates:
The UK’s economic performance over the past year is no surprise. When you tighten fiscal policy significantly after a major financial crisis, both history and mainstream economics would tell you to expect what we have now : no growth in broad money or credit, persistently high interest spreads for small businesses and households, flat or contracting private consumption and retail sales, a dearth of construction and declining real wages – all only partially offset by some expansion in exports. In such a situation, you should expect little domestically generated inflation, and that is also just what the UK has.
The recent consumer price inflation rates above 4 per cent result from this year’s value added tax increase and the recent energy price shock. Removing those factors, UK inflation has averaged 1.5 per cent over the past year – including any remaining effects of sterling’s past decline. Of course, higher taxes and energy prices shrink British real incomes, but the monetary policy committee was right not to respond to them, and should not do so now.
I agree, and so does Martin Wolf, whom I saw yesterday. We’ll see if the BoE has the intestinal fortitude to stand up to conventional madness.
Finally, the invisible bond vigilantes are intensifying their invisible attack: 10-years down to 3.06 percent, and the TIPS spread falling.