Expect a higher cost of living in 2011, says Bank of England

Governor Mervyn King predicts a weak economy, above-target inflation, and major risks from overseas next year - but no double-dip, at least.

by James Taylor
Last Updated: 19 Aug 2013
All eyes (in the City at least) have been on Threadneedle Street today, where the Bank of England unveiled its latest Quarterly Inflation Report. And it wasn't massively reassuring: Governor Mervyn King said inflation would probably remain above its 2% target for the whole of next year, thanks to rising commodity prices and tax hikes, meaning that many of us are likely to suffer a higher cost of living even as the fiscal squeeze kicks in. But perhaps more worrying was the Bank's tacit admission that there's only so much it can do; ultimately, the UK's economic fate depends to a large extent on events elsewhere...

King suggested today that the recovery would remain on track. But he thinks it's unlikely to continue at its current pace, particularly once the fiscal consolidation starts in earnest and households are forced to cut their cloth accordingly (which not all of them are doing yet, he reckons). In fact, given the likely slowdown in domestic spending, he said, growth will 'depend heavily on developments in the rest of the world'. And the bad news there is that he thinks the world economy is facing 'difficult and dangerous times', especially in the euro area. So he called on the politicians at this weekend's G20 summit to pull their fingers out and agree on some concerted action.

So what does that mean for inflation? Well, you could argue that the Bank isn't really sure; Merv said there were 'sizeable risks in both directions'. But its best bet appears to be that inflation will remain above its 2% target for at least the whole of 2011, before falling back again - although he reckons that on both a two and three-year time horizon, the chances of getting within 0.5% of the target are just one-in-four. 'That underlines the uncertainty faced by the Committee,' complained King, 'We cannot be sure which of the big risks to the outlook will materialise.'

Today's statement makes it pretty clear that even the big brains at the Bank can't agree on what's going to happen to the economy in the next couple of years. King admitted there was 'vigorous debate between members, and a range of views that is wider than usual, about the weight to attach to those different risks' (as evidenced by last month's MPC meeting, where seven voted for no change, one voted for higher rates, and one for more quantitative easing).

This serves as a timely reminder that, ultimately, the Bank's policy-makers can only do so much. They're grappling with imperfect information, which is hugely open to interpretation. And even if they do everything right, there's a still a chance that events elsewhere will conspire to undermine their strategy. Today King drew an analogy between the MPC and England's batsmen preparing to defend the Ashes – watching carefully, and perfectly balanced to attack or defend. Like the Barmy Army Down Under, we'll follow their progress more in hope than expectation.
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