Inflation

PUBLISHED : Sunday, 30 October, 2005, 12:00am
UPDATED : Sunday, 30 October, 2005, 12:00am
 

Goldman Sachs has cautioned inflation may rise sharply next year, particularly in the US, as tight labour markets lay the groundwork for rising wages.


The core inflation rate - which excludes volatile food and energy prices - remains contained, they said, but it could rise if higher energy costs eventually feed into other prices and wage demands.


Surveys on inflation expectations in the US, Japan and Europe show people are beginning to worry about inflation and its impact on their income.


'We find strong evidence that the risks to inflation increase as the unemployment rate approaches its natural level and unit labour cost rise,' says the bank's Global Economic Weekly. 'To some extend the first stage of this process is already happening in the US, where unit labour costs have risen sharply as productivity growth has slowed.'


The bank forecasts the Federal Reserve will increase interest rates to 5 per cent by the middle of next year. They expect the European Central Bank to remain on hold until the end of next year, while Britain is expected to resume its tightening cycle in the second half of next year. They said only a significant downturn in global demand would change the inflation outlook.


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