wages_inflation

Wages increasing by 2.5 per cent is still less than inflation, but if they keep that level up, we may find that average wage rises will overtake inflation towards the end of 2018.

Meanwhile, in the US, the Federal Reserve chose to increase US interest rates from 1.25 to 1.5 per cent. It is suggesting that it will increase rates three times next year, such that US rates will be at 2.25 per cent by the end of 2018.

With UK unemployment at its lowest level since the mid-1970s, many economists expect the Bank of England to increase rates next year too, although not to the extent they expect for the US.

With UK inflation expected to fall, with euro inflation less than one per cent, and with US inflation at 2.2 per cent in October and core US inflation at a mere 1.7 per cent, there does not seem to be anything to worry about.

Central banks increase rates to stop an economy from overheating, creating inflation, but despite years of ultra-low interest rates, inflation remains very modest.

So far, nothing scary.

But, last month, the CBI survey of Distributive Trades revealed that the average price rose by its highest level in 30 years in October.

That really is excessive. Is this data telling us that something else is going on? If so, central banks may need to increase rates much more rapidly than has been assumed.

On the other hand, data on UK producer prices is much less worrisome. Sure, input prices rose by 7.3 per cent in October, from 4.8 per cent the month before, but then earlier in the year input prices rose at 20 per cent.

The next CBI Distributive Trades survey is due out next week. Let’s see what it says. But if it continues to point to sharply rising prices, there may be cause for concern.