Mervyn faces the Music

The Governor and his colleagues faced the press yesterday at the launch of the quarterly inflation report .... here is a selection of comments from them from questions fired from economics journalists, there is some great evaluation in here for AS and A2 economics students!

Bank of England Inflation Report - May 2008

Inflation conditions have deteriorated in the last three months as cost-push factors have become more severe:
Oil prices have doubled (modest increase in oil supply relative to strong growth of global demand; oil in non-OPEC countries is harder to extract)
Gas prices have doubled
Food prices have risen by 60% (more reasonable to expect a supply-response to higher food prices in the next year or two)
Higher prices are squeezing real take home pay which may cause a sharp slowdown in output

Commercial property and housing prices are falling sharply
The savings ratio is likely to rise as the economy re-balances towards saving and exports and away from consumption and imports - this rise in household saving will be reflected in weaker consumer spending on goods and services

Comments to journalist questions

Life outside the City:
Economic conditions and confidence outside of London and the financial/property sector is extremely marked - but the squeeze on real incomes will affect spending power right across the economy

Inflation targets:
Changing the inflation target does nothing to change the dilemma of slowing growth and rising inflation resulting from price-level shocks from the rest of the world. “This is not the moment to change the inflation target” ... but maybe this is the time to start thinking of how to introduce asset prices into the inflation measurement.

Wealth effect and consumer spending:
Investment in housing is falling back as house prices fall but not as much as we are seeing in the United States
There is no direct causal link between house prices and consumer spending .... it depends on the other macro conditions (3rd factors) prevailing at the time - for example people’s expectations of their future incomes
The change in the availability and price of credit is an important factor causing a slowdown in consumer confidence and spending
Housing repossessions remain well below where they were the last time the housing market was in recession (early 1990s)

Wages and Prices - risks of a wage-price spiral:
Falling real incomes might at some point provoke a reaction leading to a rise in wage claims - the BoE is concerned to avoid this
But there is less chance of this during an economic slowdown when people are concerned about their jobs

Depreciation of the pound and the effect on inflation:
Will the fall in the value of sterling against the euro cause a rise in inflation?
A lower pound increases the cost of imports - will they be passed through into higher consumer prices?

Further coverage of the Inflation Report is available here