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The Bank of England may be faced with a damned if you do, damned if you don’t moment in which using monetary policy to fight inflation may actually make the problem worse, according to the Telegraph.Ernst and Young analysts are arguing that a rate hike would lead to an increase in mortgage payments, as many such loans in the UK are linked to the key interest rate. These payments are included in the UK’s inflation index, so prices will continue to rise, even if the government tries to bring them down.
More worrying is that this price rise could be the one that triggers an increase in wages, and kicks off the wage-price upward spiral in the UK.
From Ernst and Young’s Peter Spencer, via The Telegraph:
“We are of the view there would be a wage-price spiral because… this could be just the straw that breaks the camel’s back,” he said. “If RPI went to 6pc, it would put extraordinary pressure on wage settlers to concede to demands.”
The UK’s austerity programs, and resulting weak economy and rising inflation, has been suggested as a warning sign for the U.S. policy makers.