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According to the latest ONS report, inflation is rising as a consequence of the (pre/post) Brexit devaluation. This graph about the Input PPI is pretty revealing (taken from here):

enter image description here

Yet, with the risk of an oncoming economic crisis, and interest rates at record low (probably at the ZLB), what can the Central Bank do?

Some say inflation is a good thing, as it "greases the economy" by lowering real wages. But that surely will only hit the demand even more. I'm puzzled!

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You could say what the chart represents.

It is in fact the changes in the input Producer Price Index http://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/producerpriceinflation/july2016 with a headline statement of

the total input price index rose 4.3% in the year to July 2016, compared with a fall of 0.5% in the year to June 2016

But this effect is smaller as it affects the economy as a whole. For the output Producer Price Index the headline statement is less dramatic:

Factory gate prices (output prices) for goods produced by UK manufacturers rose 0.3% in the year to July 2016, compared with a fall of 0.2% in the year to June 2016.

This has not yet had a substantial effect on consumers, where for the Consumer Prices Index http://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/july2016 the headline statement is:

The Consumer Prices Index (CPI) rose by 0.6% in the year to July 2016, compared with a 0.5% rise in the year to June.

I would be surprised if any of today's data surprised the Bank of England:

  • Imported inputs for UK producers now cost more due to a weaker Pound sterling
  • This has a relatively smaller effect on output prices, meaning British exporters are potentially more competitive internationally
  • This has not yet had a substantial impact on consumers

What the central bank does not yet know includes:

  • how much of an effect this will have on consumer prices in the longer term
  • how negative this will allow real interest rates to be if nominal interest rates are kept close to zero
  • how much of an effect this will have on imports and exports
  • how much of an effect this will have on consumption
  • how much of an effect this will have on investment

though it might try informed guesses. Investment, consumption and exports in particular will be affected by broader factors including predictions about the long-term impact of a future Brexit.

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  • $\begingroup$ Yes. Forgot to mention the link. Now, you did not comment on the options available for the BoE. $\endgroup$ – luchonacho Aug 16 '16 at 18:46
  • $\begingroup$ I did say that I doubted any of today's data surprised the Bank of England. It made already done a symbolic cut in interest rates (though kept them positive) plus some more substantial unconventional measures, aimed at increasing lending and reducing the impact of a Brexit driven recession. I suspect it will not be worried about inflation from currency depreciation unless the domestic response leads to an inflationary price/wage spiral taking CPI inflation permanently above about 3% $\endgroup$ – Henry Aug 17 '16 at 1:05
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The Central Bank can do very little. The latest round of QE resulted in the Bank having to pay way over the odds for gilts. We've already hit a prolonged near-Zero Interest Rate Policy (ZIRP)

Independence of the Bank of England, and devolving responsibility to it, away from Central Government, is fine in normal times. These aren't normal times. Only Central Government has the firepower needed.

This one-off blip due to the declining pound is not the sort of thing the Bank should be reacting to, anyway. It's just one consequence of the threat of an impending Brexit; the other consequences will be deflationary, and will harm growth, over the long term: and that's what the Bank is trying to tackle.

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