We may now be over the worst of the “credit crunch” but policy makers both here and the US still have very difficult choices to make. Cost pressures, especially food and energy, are highly likely to remain on upward trend as demand outstrips supply. This should force Central Banks to increase rates to combat inflation. However our ability to increase incomes to remains limited and the old standby of re-mortgaging is closed. The losses incurred by the banking sector on dubious US mortgages has both reduced their ability and desire to lend as well as forcing a reappraisal of the true price of risk. To a large extent monetary policy could be redundant, as any downward moves in Base Rates will not lead to a corresponding reduction in interest rates to consumers. True, the cuts in both UK Base Rate and the US Prime Rate may make consumers less worried but it wont convince them to spend more. In theory, if monetary policy is ineffective then fiscal policy must take the lead. The US Government is already putting a whole series of tax reductions in place. Unfortunately over here our Government is still increasing the tax burden. Distressingly, only now has last years abolition of the 10p-starting rate become an issue and it is concerning that the beneficiaries of this decision are those earning £18,000 and not the low paid. Thankfully companies, although under significant cost pressure have not started to shed jobs as yet. If employment levels can be maintained (and it must be the private sector) then we may only face a temporary reduction in economic growth.
Looking at this week, several key sets of data are due for release. We start today with March’s PPI. It is almost certain that energy and commodity prices will drive inflation at the factory gate even higher although manufacturers will still be unable to pass on anything like the bulk of this increase. Tomorrow it is the turn of the all important consumer price index numbers. Again CPI will come in over target but we expect the current trend of rampant food and energy costs to be partly offset by fall consumer goods prices to remain in pleace. Wednesday sees the release of March’s claimant count numbers and ILO and average earnings for 3 months to February. Again we expect the current trend of low wages growth and steady employment levels to be maintained.
