Download The Global Credit Boom: Challenges for

Take Five: 5 reasons to worry about
UK inflation
Dr Andrew Sentance
Former Member
Monetary Policy Committee
Presentation to M&G Inflation Conference
London, 4 October 2011
Reasons to worry about UK inflation
•
Inflation performance
•
Global inflationary pressures
•
Sterling
•
Persistent services inflation
•
The MPC
UK inflation significantly above target
% per annum increase in consumer prices index
Source: Office for National Statistics
UK economic growth
% per annum change in economic activity
* Weighted average of manufacturing and services output
Employment in UK recessions
Index of employment, 100 = cyclical peak
Number of quarters from employment peak
Source: Office for National Statistics, Labour Force Survey
Rebound in nominal demand
% per annum change in key measures of nominal demand
Source: Office for National Statistics
High inflation squeezing retail volumes
% per annum growth in retail sales (3-month ave)
Source: Office for National Statistics
Global inflation on the rise
% per annum change in consumer prices
Source: The Economist
Real oil and commodity prices
Deflated by US consumer price index; 2000=100
350
S&P GSCI Agriculture and Livestock index
300
S&P GSCI Industrial Metals index
Brent crude spot price
250
200
150
100
50
0
1980
1985
Source: IMF and Thompson Datastream.
1990
1995
2000
2005
2010
Global primary energy consumption
Million tonnes oil equivalent
6500
OECD
6000
Non-OECD
5500
5000
4500
4000
3500
3000
2500
2000
1980
1983
1986
Source: BP Statistical Review 2010
1989
1992
1995
1998
2001
2004
2007
The rise of Asia
Percentage share of world GDP, current market prices and exchange rates
40%
US
EU-27
Asia-pacific G10 *
35%
30%
25%
20%
15%
10%
5%
0%
1980
1990
2000
2010
*: Includes Australia, China, India, Indonesia, Japan, Malaysia, Singapore, South Korea, Taiwan Province of China and Thailand.
Source: IMF World Economic Outlook
Shares of world GDP and population
2010 figures
GDP at market prices
EU-27,
26%
US,
23%
Apac
G10*,
27%
Other,
24%
Population
Apac
G10*,
46%
EU-27,
7%
US, 5%
Other,
43%
*: Apac G10: Asia-Pacific G10, including Australia, China, India, Indonesia, Japan, Malaysia, Singapore, South Korea, Taiwan
Province of China and Thailand.
Source: IMF World Economic Outlook, World Bank and Eurostat.
Prospects for 2011 and 2012
% per annum change in GDP, latest consensus forecast
* US, EU and 11 other major economies making up 85% of world GDP
Source: The Economist
World economic growth
% per annum change in GDP in G-13 economies*
* EU, US and 11 other economies accounting for 85% of world GDP
Source: IMF World Economic Outlook, April 2011, and The Economist
The global recovery in context
% per annum change in GDP
* US, EU and 11 other major economies making up 85% of world GDP
Source: IMF and The Economist
Monetary policy, the global economy
and inflation
Impact of monetary
policy
Cost of
imports
Global
economy
Demand
Pricing
climate
Exchange rate
Domestic
demand
Expectations
and credibility
UK inflation
Sterling depreciation since 2007
Rebased to 100 in January 2005
110
105
100
95
90
Euro-Sterling exchange rate
85
Sterling EER *
80
Average EER *, 97-07
75
70
2005
2006
2007
2008
*: Effective exchange rate
Source: Thompson Datastream and Bank for International Settlements
2009
2010
2011
Episodes of Sterling depreciation
Index, base year = 100
110
100
90
80
70
1967-1971
1972-1977
1991-1996
2007-2010
1981-1986
60
50
0
1
2
3
Number of years from start of period
Source: Bank for International Settlements
4
5
Euro/UK inflation differential & exchange rate
Euro/ sterling
%
0.3
2.0
1.5
0.2
1.0
0.1
0.5
0.0
0
-0.5
-0.1
-1.0
-0.2
-1.5
Euro-area/UK CPI differential (RHS) *
-2.0
Euro-Sterling exchange rate (LHS) **
-0.3
-0.4
1997
-2.5
-3.0
1999
2001
2003
2005
2007
*: Euro-Sterling exchange rate is expressed as the deviation from its average over the same period.
Source: Thompson Datastream
2009
2011
UK goods price inflation
% per annum change in goods prices
Source: Office for National Statistics
Persistently high services inflation
% per annum change in consumer prices
Source: Office for National Statistics
Reasons to worry about UK inflation
•
Inflation performance
•
Global inflationary pressures
•
Sterling
•
Persistent services inflation
•
The MPC
Large official inflation forecast errors
Mean of forecast percentage annual increases in consumer prices
6
May-09
Nov-09
May-10
Nov-10
May-11
Actual CPI inflation
5
4
3
2
1
0
2007
2008
Source: Bank of England
2009
2010
2011
2012
2013
Unemployment in UK recessions
Unemployment rate, % of labour force
Number of quarters from employment peak
Source: Office for National Statistics, Labour Force Survey
Capacity utilisation in UK economy
Bank of England Agents’ scores relative to normal
Source: Bank of England
Wage growth picking up
% per annum growth in private sector average weekly earnings
Source: Office for National Statistics
What is wrong with the MPC?
•
Policy-setting no longer consistent with 2% inflation
target and mandate
•
MPC seems prepared to inject more stimulus even
when inflation is more than double target level
•
Poor forecasting record, yet forecasts critically
underpin current policy judgements
•
Benign neglect of the pound
•
No track record of taking tough monetary policy
decisions to underpin credibility
•
Dominated by internal consensus around Governor
Conclusions
•
UK inflation performance reflects structural problems
in current inflation target regime
•
MPC has used its discretion to redefine inflation
target framework post-financial crisis
•
External members cannot effectively counter a strong
internal block dominated by the Governor
•
There has been an overt policy of benign neglect of
the pound, which has fuelled inflation
•
UK monetary institutions and practice have an
inflationary bias – investors beware!