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When unemployment falls and wage inflation rises

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In the past week both the CBI and the TUC have urged further cuts in interest rates for the UK economy. However, is there an element of short-termism in their calls?

Latest figures reveal that wage inflation took a leap in April, especially due to increases in the public sector which rose from 4.4% in March to 5.6%, so that rise across all sectors was from 4.8% to 5.3%.

Consider what happens then when there is a shortage of skilled labour, increasing wage inflation and a newly elected government which is committed to increasing spending in public services. It is a classic recipe for an increase in inflation.

It will prove to be a tough test for Tony Blair, Gordon Brown et al. and their spending plans. It will prove to be a tough test for Estelle Morris and the new Education and Skills department as increases in training and development will be need to be sustained in a tougher climate. It will prove to be a tough test for Alistair Darling and the new Work and Pensions department as those remaining on benefits will need extra help in developing employment skills.

When the Monetary Policy Committee (MPC) decide that inflationary pressures are too high, interest rates will start to rise once more. The post 1997 election move, which saw interest rate control pass from the government to the MPC should alleviate some of the impending unpopularity which would otherwise have been directed at the government.

For the TUC and the CBI, HR Zone also has a message: You both have strong arguments for chasing interest rate cuts to help business and employment prospects. This is a short-term fix though, and the spectre of inflation, is the real danger. Your joint moves toward co-operative working, “Partnership Working”, has been seen as a positive, responsible and constructive initiative by a wider audience than is fully appreciated. That “Partnership” approach will be put further to the test in coming months.

“World Class” is more than mere rhetoric, the UK is currently well placed to become world class, but it will take a “concerted” effort from everyone.

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