Thursday, 2 November 2017

No rate rise without a pay rise, says Positive Money.

Nice catchy phrase, but is there any substance behind it? The quick answer is “not much”.

The most relevant article on the above topic published by Positive Money seems to be this one entitled (unsurprisingly), “No rate rise without a pay rise”. And what will bring about a pay rise apparently is a “robust programme of government spending”.

Well the obvious problem there is that the Bank of England’s judgement is that the economy is at capacity, or put another way that any further increase in demand (e.g. in the form of more government spending) will be inflationary, which would raise “pay” in terms of pounds, but would probably not raise pay in real terms, and might even reduce real pay because of the costs of excess inflation.

A much better argument against an interest rate rise was produced a few days ago by Simon Wren-Lewis who claimed that inflation is currently to a significant extent cost push, and thus that a rise in demand, or at least leaving interest rates and demand at present levels, will not be inflationary.

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