The Governor of the Bank of England probably overdid the Olympic analogies but his broad assessment in introducing the August inflation report is a reasonable one. He said:
"A year ago inflation was rising and heading towards 5%. It has now fallen to within touching distance of the 2% target. The big picture in today’s Report is of a further decline in inflation, as external influences fade and domestic cost pressures ease, and a gradual recovery in output. Nevertheless we are navigating rough waters and storm clouds continue to roll in from the euro area.
"Output has contracted in each of the past three quarters, but the underlying picture is probably not as weak as the headline data suggest. The extra bank holiday in June is likely to have reduced output in Q2 by around ½%, an effect that should unwind in Q3. And a large fall in construction output in the first half of the year, which seems at odds with survey data, is unlikely to be repeated. Even looking through these erratic factors, though, the underlying picture is that output has been at best broadly flat over the past two years, and has continually disappointed expectations of a recovery.
"In contrast, the labour market has remained surprisingly resilient in recent months. Private sector employment has grown robustly and unemployment has edged downwards. Although welcome news in its own right, the resilience of employment, combined with the weakness of output, means that productivity growth has been unusually low. That continues a recent pattern of both weak output and productivity growth that is difficult to explain."
The Bank doesn't believe the recent GDP figures and thinks the Jubilee effect alone depressed GDP by around 0.5% in the second quarter - add in a weather effect and you get a flat figures - but has been obliged to revise down its growth forecasts again. Nonetheless it thinks the mechanism for restoring growth - the recovery in real incomes - remains intact. It will, however, be a subdued recovery.
The Bank expects inflation to undershoot the official target for most of the next three years, suggesting the unanticipated squeeze on spending will ease. Buit further monetary stimulus is more likely to come from additional quantitative easing than cutting interest rates. A rate cut from 0.5% was, said Sir Mervyn King, "neither here nor there". The inflation report is here.