Ben on 2008/05/29 11:53:46 PM - Nicolaas

Ben on 2008/05/29 11:53:46 PM - Nicolaas

Finweek


Are you serious? This would worsen inflation like you have no idea. Inflation targeting hinges CRITICALLY on the extent to which players in the economy believe the target will be maintained and sought after. If wages are increased in line with inflation, or possibly above inflation, this causes what economists call a "wage spiral".

Costs like salaries - what you term contant items - will need to be covered by way of higher prices from the firm. Isnt this obvious? If people demand higher wages, this worsens inflation. So if the accountant raises your salary by 1.2% every month, and this cost is passed on to the consumer as a 1.2% increase in the price of that company's product every month, can you see that this causes inflation? It all well and good to "maintain a persons real salary" but this will cause massive inflation that will spiral out of control.

A better tactic is to aggressively tackle inflation, to make everyone aware that the government is ADAMANT that they are sticking to it, lest workers demand increases in wages above inflation. It simply isnt possible to keep inflation at 3-6% if people demand wage increases of 10% a year...