Monday, September 11, 2006

Input prices fall faster than expected

Falls in oil prices have led to a reduction in the input price pressure which should translate to less inflationary pressure through the supply chain. The conundrum this could pose if house prices continue to rise, and if that rise becomes particularly rapid, is the need to choose between an appropriate interest rate for manufacturing industry which is fragile and has no serious cost pressure and an appropriate rate for an overheating housing market. We've faced this problem before and it rarely goes well. However, on balance I would still be betting on interest rates rising slowly if at all.

The problems we're facing setting an appropriate rate for the different sectors and regions of the UK economy give something of a hint at the nightmare facing someone having to set an appropriate interest rate for Germany and Ireland. Wim Duisenberg wasn't Dim; the European Central Bank faces some awful decisions.

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