David Prosser: Why higher inflation may spell job cuts

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The Independent Online

Outlook Opinion is divided over whether the latest spike in inflation is a blip or a more worrying long-term problem. Mervyn King's letter to the Chancellor says he is confident of bringing price rises back within the Bank of England's target range relatively quickly – and some of the January increase is accounted for by obviously one-off factors, such as the return to the full rate of VAT. The counter-argument is that as the world economy moves into recovery, we will see rising demand for commodities – oil is a big part of the inflation story – and that may mean price rises do not come down as quickly as most people expect.

However, even if you accept the blip theory without question, the January spike can still cause problems. In particular, we are coming up to peak season for wage rounds in both the public and private sectors.

A trade union research group warned last week that the number of employers looking for staff to accept a pay freeze will increase in 2010, despite the recession officially having come to an end.

That could put employers on a collision course with staff. It was easier to sell a pay freeze last year, with the recession in full flow and inflation – on the retail price index measure – negative during some periods. This year, despite ongoing cost pressures on employers, many staff will not be so easily deterred from pushing for a salary increase. With inflation at its current levels, not getting a bit more will leave people feeling worse off – and the tax rises to come will compound that feeling.

The result may be more industrial relations disputes and, in the current economic environment, that could be particularly difficult.

We get the latest unemployment numbers today. But whether or not last month's unexpected fall is repeated, it is clear that joblessness has risen much less quickly than one would have expected given the prolonged nature of the recession. The chief reason for that seems to have been the healthy arrangements many employers and employees have come to – with short-time working, pay freezes and other flexible deals preferred, wherever possible, to redundancies.

However, if this contract is about to break down, as workers demand compensation for the rising prices they face, many employers may feel they have no option but to step up redundancy programmes. Most economists already expect unemployment to rise a little further before peaking, but job losses may yet rise to the levels originally predicted during the slowdown.

Higher inflation is to be feared, in other words, even if it proves to be short-lived. And if the gloomier forecasts are right, our labour market may not get off so lightly from this crisis after all.

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