On September 22nd, 2010, Spencer Dale, a member of the Monetary Policy Committee for the Bank of England and its Chief Economist, shared his thoughts on the current elevated inflation levels in the U.K. at Cardiff Business School. In an effort to maximize the U.K.’s economic growth, the Bank of England set a target inflation rate of 2%. Unfortunately, the inflation rate has been above 2% for the last four years. During Mr. Dale’s visit to Cardiff Business School, he was asked questions as to why inflation was above 2%.
“…what factors have caused inflation to be above the 2% target for much of the past four years; why inflation was higher than expected for much of this period; and how should policy respond?”
Those are very good questions. Mr. Dale explains…
“Our economy has been affected by a number of large shocks – to energy prices, the level of VAT, and the value of sterling – which have caused prices to increase.” These are “more than sufficient to explain the strength of inflation.” Moreover, “Some of these shocks were not predictable in advance. And even if they were, trying to use monetary policy to offset short-run movements in inflation is likely to have amplified output volatility.”
He continues to explain…
“My current assessment is that changes in the structure of the economy, the nature of the financial crisis, and the different role played by policy all affected the behaviour of inflation during the downturn. And it is important that we learn from those developments to help set policy in the future.”
Good answer, but what’s really an interesting question is how policy should respond to the elevated inflation levels. Spencer response to that is…
““Monetary policy is at extraordinarily loose and a small tightening would still leave policy hugely stimulatory…But it is not as straightforward as that – there are significant risks to both sides of the inflation outlook.”
“…The response to a possible loss of credibility is clear – monetary policy would need to tighten, possibly aggressively so. But I think this risk remains just that – a risk. Despite the dangerous talk, most measures of inflation expectations still appear broadly consistent with hitting the inflation target in the medium term.”
“I do not know when policy will next change or in what direction. But I can assure you that when making this decision, the objectives of policy will be clear and unchanging: inflation, inflation, inflation.”
So it is safe to say that inflation will definitely on the minds of the Monetary Policy Committee members during the next meeting.
Mr. Dale believes that tightening monetary policy, just a little, will help combat inflation while still being stimulatory. That’s a big. We”ll see if there are any changes in the monetary policy in the next couple of meetings.
If you would like to read the entire press release titled: Inflation, Inflation, Inflation by Spencer Dale: Click Here
I’m Stephan Smith and thank you for your time.