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Consumers dance but must face the music

“There may be trouble ahead,” crooned Frank Sinatra, and in a less succinct way this was the song being sung by Mervyn King last week.

In a speech to the Scottish financial fraternity, the governor of the Bank of Eng- land warned that “after a period of robust economic growth we approach a somewhat bumpier stretch of road”, explaining that “a rebalancing of global demand is desirable but the way ahead may not be smooth”.

King only gives a handful of speeches a year so when he speaks each phrase and nuance is carefully considered, knowing that what he says will be pored over for an insight into the BoE’s views.

In recent weeks stock market volatility has reflected jitters about rising prices in the US.

In modern times the global trend has been towards low interest and inflation rates with the US and most of Europe seeing these and Japan still experiencing a zero rate.

This has led to cheap borrowing and a booming housing market and high consumer spending in this country.

But changes in the global economy could pose a threat to inflation in the UK. As the monetary stimulus in an economy is withdrawn, asset prices begin to rise. This correction has led to long-term interest rates moving up and a tightening of monetary policy in many countries.

Inflationary pressures are even being felt in huge and expanding industrial economies.

King told delegates: “Even in China, with its growing manufacturing base and large pool of labour, some indicators are show- ing upward pressures on export prices. That is raising our im- port prices above the increases due to higher energy costs.”

But there may yet be a little more time for dancing and romancing for UK consumers as the governor balanced gloom with the fact that the BoE is content that inflation is not “of serious concern”.

There has been speculation in the past few weeks that the Monetary Policy Committee will raise interest rates later in the year, having kept them fixed at 4.5% for the past 10 months.

This would follow the example of the US and European banks which have dealt with inflation by pushing up the cost of borrowing.

King is in the ‘wait and see’ camp when it comes to raising interest rates, telling his audience that the MPC must be “enlightened”.

So despite a survey from the Office of National Statistics showing that escalating gas and electricity bills have pushed inflation up 0.5%, above its 2% target for the first time in six months, and another from the Department for Communities and Local Government showing house price inflation hit an 11-month high of 5.15% in April, for now we can still face the music and dance.

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