Wednesday, November 10, 2010
Inflation report: united by uncertainty
Posted by David Smith at 01:00 PM
Category: Thoughts and responses

One member of the Bank of England's monetary policy committee, Andrew Sentance, has a clear idea. He believes the recovery will continue to exceed expectations, that there is limited spare capacity in the economy and that, in consequence, inflation will stay uncomfortably high. He wants higher interest rates.

Another, Adam Posen, believes that the recovery will be weak, with the economy flirting with stagnation and deflation. He wants more quantitative easing, though done in a different way than before.

The uncertainty that characterises the Bank's November inflation report must therefore refer to the other seven members. Their view was summed up by Mervyn King:

"In the past year, our economy has begun to recover and GDP growth has been above its long run average. But whether that recovery will be sustained depends heavily on developments in the rest of the world, as domestic spending, especially by the public sector, is likely to grow more slowly looking ahead. And given the scale of the fall during the recession, the level of output is likely to remain weak."

As for inflation: "Given the quantitative importance of the different influences buffeting the economy at present, it is hard to judge how inflation will evolve in the medium term, and there are sizeable risks in both directions. On the one hand, slack in the economy is likely to reduce inflationary pressure ... On the other hand, inflation has been above the target for much of the past three years. It is possible that additional import price pass-through or commodity price
rises will push up further on inflation. And if the period of above-target outturns causes medium-term expectations to drift up, then the inflation outlook could be significantly higher."

Though its forecasts have not changed greatly since August, it is possible to detect, not just an increase in short-term inflation prospects but also rather less certainty that inflation will come down. The Bank majority is still firmly in "no change" mode but the weather vane has moved fractionally towards Sentance's view. The inflation report is here.