Macroeconomics: UK economy, IB Economics

I've only just stumbled on this; it's a good little primer on why a little bit of inflation is a good thing. There's some straightforward explanations here - looking at the importance of real wages keeping pace with inflation - and the benefits of low, stable inflation. 

The only downside? The DCU adverts

Larry Elliott drills down into today's inflation figure, noting that although it's fallen to 2.3% - largely driven by falling energy prices - there are still two main pockets of concern.

Core inflation remains high - it's down from 4.2% to 3.9% - and service sector inflation has hardly budged - falling marginally from 6% to 5.9% - both of which might deter immediate interest rate cuts. 

This week's inflation figures are going to be interesting with many people anticipating a marked fall in inflation, to close to target. As a result, many are predicting that the Bank of England is going to lower interest rates at some point in the next few months, not least given the latest admission of the Deputy Governor of the Bank, Ben Broadbent. 

A more hawkish position on monetary policy from within the MPC, albeit an external member. However, Catherine Mann is of the view that markets think rates will fall faster than they are likely to, and that the Bank is under no obligation to cut rates to keep markets (or the government) happy. 

The extent to which we live in a push-me, pull-me economy is laid bare by the latest interest rate decision. One MPC member voted for a rate cut, two for a rate rise and six to hold rates at 5.25%. And that's where they will stay. 

The Governor, Andrew Bailey outlined the reasons for the rate freeze: "We need to see more evidence that inflation is set to fall all the way to the 2% target, and stay there, before we can lower interest rates". Thus, whilst later in the year it's highly likely that rates will come down, for the next short period they're likely to remain where they are. 

Richard Partington suggests that next week's inflation figures are going to give the beleaguered Prime Minister chance to trumpet the government's success in getting inflation down. 

However, as he rightly points out, even if inflation drops to 4.4% in November, that's still a fairly significant annual increase in prices, and disinflation rather than deflation, where prices have started to fall. 

And don't get me started on why the government taking credit for tackling inflation is wholly disingenuous anyway!

The Governor of the Bank of England has suggested that interest rates aren't coming down soon, arguing that inflation's still not on track to return to target, and that loosening monetary policy at this stage would be a retrograde step. 

Phillip Inman's opinion piece in the Observer looks at this week's inflation figures which some are forecasting will fall below 5% for the first time in a year - and allow the Prime Minister to fulfil his pledge to half inflation by the end of the year. 

It's a pyrrhic victory: inflation falling below 5% has little to do with policy choices and rather more to do with cost factors dropping out of the inflation basket. Equally, even with inflation falling below 5%, there's little to crow about. Growth is moribund, the public finances strained and economic fortunes remained largely determined by global geopolitics. 

This Bank of England clip gives the absolute basics about inflation - and when I mean basics, I really do mean basics. 

Yesterday the Governor of the Bank of England suggested that we're on the cusp of a marked fall in inflation, and perhaps a pause in the tightening of monetary policy. Let's see shall we. Alas, Mark Bailey doesn't appear to be blessed with the 'midas touch' of his predecessor, or, perhaps as importantly, the public persona, so this sort of announcement didn't perhaps have the effect it might. 

That said, he also admitted that rising oil prices in August might see the next inflation figure tick up, although he seems fairly certain that inflation will be back to target by the end of next year. 

The latest inflation data for July has seen another significant fall in inflation to 6.8% largely driven by the energy price cap being revised downwards, although, of course, prices are still significantly higher than they were a year ago. 

It raises a number of questions - whether or not the government is going to hit its inflation target by the end of the year, the future direction of monetary policy.  

The current inflationary environment has prompted some interesting discussion about the nature of in the inflation target, and in this instance it's about floating the notion of the "inflationary quota" and suggesting that the last couple of years have seen the UK exceed the target to the extent that the UK is going to have to keep prices flat for the next seven years to compensate for the previous three. 

From my perspective, this strikes me as nonsense: given that you can't undo what's already happened, it's the very worst sort of hindsight. Let's just concentrate on getting inflation back down to target and not worry about the past three years. 

Whither inflation - and in this article whither inflation policy - this article looks at a number of measures that the Bank of England and government might take, including wage and price controls.

However, it stops short of considering altering the inflation target. You might ask why it is that we have a 2% inflation target, and whether a 2.5% or 3% target might be more appropriate.  

A little look at what's up and what's down in price in the last 12 months. The sharpest rise in prices? Olive oil? The sharpest fall? Gas, down by 37.5%. 

UK inflation has tumbled to 2.3% for April, down from 3.2% and fuelling calls for interest rate cuts. However, there are some cautionary noises coming from some who note that service sector inflation has scarcely shifted and this might make the Bank of England reluctant to cut rates in June. 

The latest inflation figures are going to be released this week and the consensus view is that significant falls in energy prices will contribute to a similarly significant fall in inflation. 

As ever, the government will no doubt take credit for this - but the picture for the rest of the year, and the prospect of interest rate cuts might mean that keeping inflation low will prove to be problematic. 

Excellent article in the Guardian with a Canadian academic, Louis-Philippe Rochon highlighting the arbitrary nature of the 2% inflation target. Remarkably, nearly 60 countries have adopted this as their inflation target, without there being a definitive position on why this is the case. 

Of course, no-one denies that a lower target might risk deflation, and that's most probably a bad thing, but why 2%, and not 3 or 4%? This is particularly interesting in the present environment because the 2% target appears to have become a de facto default target, and the failure to hit the 'target' necessarily shapes monetary policy debates.

Equally, given the trade-off between inflation and unemployment, is there a risk that the pursuit of the 2% target imposes higher than necessary costs in terms of unemployment too. 

Inflation's down to 3.9% in the year to November, a larger than expected drop, with fuel prices leading the way. However, it's still nearly 2% above the inflation target.

And watch for the Prime Minister looking to take credit for this today; it's got next-to-nothing to do with anything that the government has done.

The Office for Budgetary Responsibility (OBR) forecast published to accompany the Autumn Statement has downgraded its growth forecasts for the next couple of years. Whereas previously, economic growth was forecast to be 1.8% in 2024 and 2.5% in 2025, this has been lowered to 0.7% and 1.4% respectively.  Equally, inflation is going to be tougher to get back to target, only reaching 2.8 % by the end of 2024 and only reaching the inflation target by 2025.

You've got to love Paul Johnson of the IFS: not only does he lead an influential think-tank but he's also pleasing direct in his analysis, as this BBC article shows. 

His answer to the question is unequivocally 'No' - not only was the pledge to halve inflation by the end of the year disingenuous, "given the fact that Bank was, in January, forecasting that inflation would easily halve", mainly for reasons beyond either the government or the Bank of England's control. That said, he also points out that freezing income tax personal allowances increased tax revenues and will have played some part in reining in spending. 

He even argues that the government shouldn't have made the pledge on the grounds that it's no longer responsible for hitting the inflation target and that in doing so, it was in danger of muddying the waters surrounding the issue, potentially compromising central bank independence. 

The Resolution Foundation has offered a couple of interesting suggesting regarding the conduct of monetary policy, arguing that the inflationary target might be increased to 3%, and also giving it the power to set negative interest rates in future downturns, in the hope of giving it greater power to stimulate aggregate demand in extreme circumstances. 

The Bank of England has - surprise, surprise - decided to hold rates at 5.25%. This surprised markets, who were expecting a 15th successive increase.

However, despite inflation falling slightly last month, to 6.7%, the Bank of England have made it clear that they're not complacent with the Governor, Andrew Bailey, stressing that hitting the inflation target remains the aim, and the voting - 5-4 to pause rate rises - indicating that it was a close run thing. 

Adam Posen writes in the Observer about the unique nature of inflation in the UK, and how a variety of factors mean that getting it back to target is likely to be harder than achieving the same in the US and the EU.

He argues that the patterns of recent wage growth, and the lack of wage growth in certain key sectors, Brexit, the unusual nature of UK energy markets, and a lack of certainty as regards policy, not least fiscal policy, have all played a role in meaning that getting core inflation down in going to be harder than elsewhere.  

The implications of yesterday's encouraging inflation data mean that the Prime Minister's stated aim of halving inflation by the end of the year might be back on track. Despite the fact that inflation is still 6% above target, he targeted halving inflation from 10% at the start of the year and there's now greater likelihood of this happening. 

However, before we celebrate this, it's also worth bearing in mind that inflation is already far lower than this in many countries, not least Spain, where inflation is 2%. 

The National Institute of Economic and Social Research thinks that the Prime Minister might have over-reached himself with his pledge to halve inflation by the end of the year. 

Having initially made the pledge in January, when inflation was 10.1%, the are of the view that core inflation is going to remain stubbornly high, such that even by the end of the year, inflation is going to be at 5.4%.

This might look like he's only just missing the target but inflation imposes costs on society, not least on real incomes and, by definition, living standards.