Inflation
Been a while since I wrote here. Happy New Year.
Today I am thinking about inflation.
2010 is upon us and the new VAT rate has hit the UK - at around 2.5% more than the previous one.
Companies have spent a horrible year firing people and tidying up their finances, with business being difficult.
If I get the psychology of a businessman right, this is what will happen:-
- He will need to increase prices by 2.5% anyway, just to pass on the VAT increase.
- He is feeling business may be turning a corner and is by now tired of talking doom and gloom and saving money.
- He will therefore try to "round up" the increase so the prices make sense and so he can pass on an inflation of 2-5% on his prices after over 12 months of recession.
Tada! Inflation of 5-7% is possible if customers will accept it.
Will they?
I don't think this is likely in a lot of products, but it might be especially on low value essentials like food, Internet connections, car repairs, etc.
I don't see the Bank of England raising interest rates until after the election. While the economy is doing better, any effects of interest rate changes take time to be felt, and the BoE will want to know what the economic plans of the next government will be before taking action.
I do therefore predict inflation kicking in certainly in the first half of 2010. Later, I expect it to become a talking point. After that I expect a new government to take some "tough" measures, which will dampen confidence (and inflation with it).