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High inflation is necessary says Bank of England Governor

The Bank of England Governor Mervyn King has said constraints on UK take-home pay is unavoidable.

Speaking at the Civic Centre in Newcastle, Mr King said the current high inflation rate was necessary as the UK economy adjusts to higher commodity prices and becomes more competitive.

He said inflation could rise up to 5% in the next few months, before decreasing from 2012.

And he suggested that the Bank would prevent attempts by wage-setters to keep up with the above-target price rises.

He said: “Further rises in world commodity and energy prices cannot be ruled out.

“Attempts to resist their implications for real take-home pay by pushing up wages would require a response [from the Bank’s monetary policy committee].”

Despite this warning, his speech - which came in the wake of a surprise 0.5% contraction in the UK economy in the last three months of 2010 - appeared to downplay the chances of the Bank raising interest rates any time soon.

Mr King said that households had been hit not only by rising prices and lagging wages, but also by high existing debt levels, high interest rates from banks, and often an inability to borrow at all.

He also accepted that UK wages were fixed, and - coupled with high inflation - this had led to the longest decline in the real value of take-home pay in the UK since the 1920s.

This was posted in Bdaily's Members' News section by Ruth Mitchell .