Inflation is accelerating worldwide, with Britain in the lead. For the seven largest industrial countries as a group the rate is expected to rise from about 3 per cent last year to about 4½ per cent this year. The main reason is the increase in the pressure of demand, which has raised commodity prices, and which has resulted in the highest level of output relative to capacity since 1973 (see Chapter 2). Most countries, the UK in particular, have responded by raising interest rates, which will slow down growth rates this year and next.

The Treasury and Civil Service Committee of the House of Commons said in their Report on the 1989 Budget that ‘the Chancellor on a tightrope’, meaning that the economy faced dangers of recession on the one hand and of accelerating inflation on the other. In our central forecasts we show a long period of slow growth rather than a recession, and the rate of inflation measured by the retail price index slows down very gradually from its current rate of just under 8 per cent. On this occasion, however, we give prominence to two variants on the central forecast, one with domestic demand continuing to grow quite fast despite the high level of interest rates and the other with an abrupt fall in demand in response to the tightening of policy last year.

Our February forecast suggested that developments in the short term would be dominated by fears of accelerating inflation and policy responses to them. This has indeed been the case. In Japan, Germany and the US wholesale prices have begun to rise relatively rapidly. Although commodity prices, especially of metals and minerals and of developed country foods, have fallen in recent weeks, at least in dollar terms they remain high and oil prices appear to have hit temporary peaks at the beginning of the quarter. These developments are the result of demand pressure. Our equations for real commodity prices, which were reported in the August 1988 issue of the Review, do have rather strong influences from world industrial production in then. As commodity prices are more timely than figures for demand and output they have often been early indicators of rising demand and we believe that they are currently, and correctly, filling this role.

This study compares samples of matched plants in Britain and Germany engaged in the manufacture of women's outerwear; it follows earlier matched plant studies, also published in the National Institute Economic Review, which examined matched plants in metalworking and furniture manufacture in these two countries. German clothing manufacturers specialise in high-fashion items produced in great variety of which a high proportion is exported at high unit prices; the typical British manufacturer concentrates on more standardised items produced in long runs and is consequently more vulnerable to competition from lower-cost producers in developing countries. The study examines the contribution of machinery, new technology and skills to differ ences in clothing productivity in the two countries. A final section discusses future trends in the industry in the light of the 1992 proposals for a Single European Market.

Previous comparisons of French and British vocational training, published by the National Institute in this series, have focused on mechanics, electricians, construction workers and office workers; these drew attention to the importance of French full-time vocational secondary schools for 14-18 year-olds. This article compares training for the retail trades in the two countries during the present period of structural change brought about by the advance of self-service. in the light of French experience, current British policies for raising the numbers trained in retailing occupations, and for more coherent training standards, are critically examined.

Official statistics suggest that over the last two decades the commercial service sector has grown rapidly both in absolute terms and relative to the rest of the British economy. Given the importance of service activities, and the fact that many of them are notoriously difficult to quantify, it is desirable that the reliability of service output measures be subject to scrutiny and, where possible, improvement. Accordingly this article presents some alternative output measures which have been compiled for financial, recreational and catering services, and compares the picture which emerges, for the economy as a whole and for individual service industries, with, that portrayed by official data.

Macro Modelling Notes is a new section of the Review, which we hope will appear on a regular basis. It will contain a small number of very short papers that have arisen from applied macro modelling work at the Institute or elsewhere. In the course of building and operating macro models, a large amount of information is used and produced that may never enter the public domain. This may be because the information is not substantial enough to justify a whole journal article, or because it is specific to the practice of using a macro econometric model. However this information is often of general interest to other economists, and is nearly always helpful to other macro modellers. This section is designed as an outlet for information of this kind, which might otherwise not be published in any readily accessible form.

The three notes below provide three different examples of this type of note. The first involves econometric practice, and shows how long-run standard errors can be simply derived using standard regression techniques. The second presents some econometric results on export pricing obtained during normal ‘model maintenance’ of our world model GEM. The third considers the problem of setting terminal dates for a consistent expectations model.

This new section of the Review is designed as a vehicle for all UK and overseas macro modellers, and therefore outside submissions are strongly encouraged. Submissions must be of about the length of the notes shown here, and contain relevant material that does not form part of a larger article soon to be published. Unlike Review articles, these notes will not normally be refereed, but the Editorial Board may consult expert advice when necessary.

The Institute World GEM, has for manufacturing export for each of the G7 countries.

Dynamic optimisation problems involving rational expectations require a transversality condition to produce a unique solution (see Hall, Henry and Wren-Lews, 1986, for an example). These transversality conditions generally amount to a statement about the nature of the endogenous variable in the infinite Song run; for example, that the long run involves a stable equilibrium. An analagous problem arises in econometric macro models, where a unique solution requires a ‘terminal condition’ for any forward-looking variables beyond the solution period of the model. Transversality and terminal conditions are not equivalent, however, because we cannot solve macro models into the infinite future (see Hall and Henry, 1988, pages 192-198).