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Gulp!

There's more evidence that pay settlements are edging up in response to higher inflation. The pay research group, Incomes Data Services, says the median settlement for pay rises in the last three months has been 3.5%, which is half a point higher than the previous published figure.

It was a month ago that the first trickle of data suggested an upward trend in pay rises. But with 64 pay deals now effective this month, the evidence is more than anecdotal.

If the Bank of England was hoping that higher inflation would be dismissed by pay-negotiators as nothing more than a blip, the news is discouraging. Especially, as many of the rises included in this latest survey were settled before the headline inflation rate hit 4.4%.

If pay rises too fast, it obviously threatens to push inflation yet higher.

The good news is that the Bank can always cure the problem.

The bad news is they only have one remedy, and that's to use ever higher interest rates to reduce borrowing and spending, to slow the economy down and to make jobs more insecure. That'll make us worry less about how much extra we're getting this year!

This is a real test of the Bank's credibility. If we all believe the Bank really will crack the whip to hold inflation down, then the Bank may not need to hit us at all, as we'll "behave" in the knowledge that inflation is going to be low again soon.

But if the Bank lacks credibility, and we don't really believe their threats, then we're probably in for a good whipping to knock us into line.

The Bank has always thought it has credibility as polls have long suggested that people believe inflation will be about on target.

But the Bank has not faced a test of its credibility as severe as this one, since gaining independence ten years ago.

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Europe: A basket case?

I'm sure you don't expect me to answer this question. We are the BBC after all, and take a view on these things. But the OECD's annual report on the Euro area has landed on my desk with some reasonable views. So let me give you my three point executive summary of the full executive summary of the actual OECD report.

First, the Eurozone recovery seems to be underway. After slow growth for ages, and after predicting recovery for about six years, it does at last seem that growth is returning. This is a good thing, as the world needs someone to be doing some shopping so the fatigued American consumer can take a rest.

Second, the euro gets the blame for everything that goes wrong in Europe, which is misguided as in fact many of problems are longer term and structural rather than currency related. They'll take a lot more to cure than merely tinkering with monetary policy.

Third, fiscal policy is a bit ragged in the eurozone. Governments have not taken tough decisions to reduce borrowing and debt, and they had better start doing so because the changing demographics of the continent mean that things are set to get worse as pension and health systems become more expensive.

By the way, these points are not gospel, just because they come from the OECD. But the organisation is staffed by some very sensible and reasonable-minded economists.

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