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Still cutting those costs - David Smith, Economics Editor, The Sunday Times


Of all the developments since the global financial crisis, perhaps the most unwelcome has been the return of inflation. We knew that there would be a banking hangover, with weak credit growth, as in the aftermath of every previous financial crisis.

We also knew there would have to be some tough fiscal decisions, with both tax hikes and an end to the carefree days of significant increases in government spending. People can debate the size of the cuts, and their pace, but few can dispute the need for them.

Less predictable was the rise in costs. Recessions and crises are supposed to destroy inflation. Many recessions, or at least slowdowns, are engineered by policymakers precisely for that purpose.

In that respect, one source of inflationary pressure has behaved in a textbook way. Pay settlements have remained subdued, averaging 2% or so in Britain, in spite of a strong rise in employment. People are grateful to be in work and sense that their bargaining power is limited.

The picture is similar across most advanced economies, though wage pressures have increased in the emerging world, perhaps unsurprisingly. That is where growth is far stronger and it is where the impact of rising energy and commodity prices is biggest.

The return of inflation is simply explained. In the worst phase of the crisis, in the autumn of 2008, the commodities’ bubble burst spectacularly. The oil price, which reached an all-time high of $147 a barrel in the summer of 2008, slumped all the way to the mid-$30s. Many commodity prices followed a similar pattern.

Then came the bounce, as a result of a global recovery led by commodity-hungry emerging economies, pushing some prices above their previous peaks. It is not yet true for oil, and may not be for some time as a result of an International Energy Agency decision to release some strategic shocks. But other commodities have raced ahead.

David Smith writes a column for Richmond Events News, our monthly newsletter with updates across the whole forum portfolio and the wider business community. To subscribe please contact us.


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