King and Darling predict further rise in inflation

19 June 2008 / by Daniela Gieseler
In their speeches at yesterday's Mansion House dinner both Bank of England Governor Mervyn King and Chancellor Alistair Darling gave a very bleak assessment of the current economic situation.

Admitting that a decade of consistent non-inflationary growth had come to an end, Mr King predicted a further sharp rise in inflation and in commodity prices: "Yesterday we learnt that inflation in May rose to 3.3%. Inflation is set to increase further over the next few months."

"Oil prices have doubled since the beginning of last year, and, in real terms, are now as high as they were in the 1970s. And further sharp increases in domestic gas and electricity prices are probably on their way."

He insisted, though, that the Bank of England will take every action necessary to prevent inflation from getting out of hand: "We believe that a slowdown in the economy this year will be necessary to dampen price and wage pressures and ensure that we fulfil our remit by returning inflation to the target."

"There should be no doubt that the MPC is prepared to take whatever action is needed to return inflation to the 2% target and to keep expectations of inflation in the medium term anchored to the target."

He continued: "We face the most difficult economic challenge for two decades. But I am confident that we can meet it. Inflation will fall back and growth will recover."

Both Mr King and the Chancellor stressed the importance of wage restraint. Mr Darling said: "We must recognise the need to reward efforts of people who work hard. But to return now to inflationary pay settlements would undermine rather than raise people's living standards with a damaging circle of wage increases eroded by steadily rising prices."

The Chancellor admitted that the growth forecasts presented in the Budget three months ago might have been to high: "The twin global shocks of rising commodity prices and the credit crunch have led to growth forecasts for advanced economies being halved in the last year. I expect the UK economy to continue growing, but for growth to slow this year."

However, he refused to accept reports that the economic situation was similar to the economic crisis in the 1970s. He said that inflation figures were still low compared to the 70s, 80s or even early 90s, and currently lower than in the euro zone and in the US, and that employment levels were at a record high, leaving the UK in a good position to master the current economic crisis.

The overall message of both speeches was that consumers will have to be prepared to tighten their belts: "Rising fuel, gas, electricity and food prices, mean that average real take-home pay will stagnate this year," Mr King warned.

He said "a loss of real purchasing power" was inevitable, and continued: "It will not be an easy time and I know that some families will find it particularly difficult."

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