Wednesday, May 14, 2008
Mervyn's speech
BoE: Inflation Report presentation
A very grim picture. Mervyn is a clear doommonger. The silver lining, the weakening Pound will boost exports. Exports? He is dreaming. The weakening Pound will mean immigrants will return home compounding economic decline.
Posted by confused76 @ 04:47 PM (755 views) Add Comment
14 Comments
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1. Sneaker said...
It's a sign of the times that 3% CPI is considered a nightmare! Times the number by 5 or 6 to get somewhere near the truth.
In the late 70's and early 80's, 3% would have been greeted with euphoria, because back then inflation figures actually mirrored reality.
On a side-note, I've heard senior managers of both Tesco and Sainsburys on Radio 4 claiming that "real inflation" is something like 2%, based on their own sales.
I just don't have any clue how they can claim it is so. Can they publish details? I'm guessing that electronics have a higher weighting, and thus plummeting flat-screen TV's offset the effect of rocketing butter, milk, eggs and bread. I buy the latter all the time, but have yet to buy the former. Seems I'm quite normal.
Too bad there isn't much fibre in flat-screens.
2. rickyb said...
I watched most of this and thought Mervyn looked quite uncomfortable answering certain questions. Personally I feel that the BofE do not take enough account of rising energy prices. The doubling in energy prices 2 to 3 years ago was inevitably going to lead to higher inflation as the impact filtered through to other goods and services. Now we have seen another doubling in energy prices over the last year, and yet the BofE still think that inflation over the medium term will settle back nicely to 2%. I'm not so sure.
3. Neo-serf said...
confused76 - 'Mervyn is a clear doommonger' is he?
Or is he waking up to the facts everyone here have been banging on about for the best part of three years?
4. justwatching said...
"We are travelling along a bumpy road as the economy rebalances. Monetary policy cannot and should not try to prevent that adjustment.
Love this quote.
Does this mean interest rates may be on the way up?
5. handle_it said...
How long before we join the Euro now ? ;O)
6. confused76 said...
King may be able to keep this merry go round spinning, then when the Pound starts really sinking he will have to jack up interest rates. BoE rate will not be up to 15%, but be sure we will see a nice round 6% by year end.
7. hpwatcher said...
Good to all comments above.
8. Who Stole My Pension? said...
Perhaps we should help King pen the letter to Brown. For example:-
Dear Prime Minister,
As you are aware inflation as measured by the CPI has exceeded 3% and thus I must write this letter to you to explain what action I am going to take to return CPI to 2% or less. At the BoE we have thought long and hard about this problem and decided that we ought to:-
a) Drop energy prices (or anything else that is increasing in price) from the CPI index
b) Include house prices in the CPI index. As you may remember I told you a while ago that I was worried that house prices were not included in the CPI index.
With these changes we are confident that the CPI index will return to less than 2%
Yours faithfully
Mervyn
9. uncle tom said...
He is well and truly caught between the Devil and the Deep Blue, and, to his credit, is not pretending otherwise.
I have noticed before that the BOE radar is fairly short range (despite making their longer range predictions).
Taking a more distant view, I pointed out over a year ago on this site that the outlook for inflation was dire, realising that the rise in commodity prices was not a brief spike, and that wage inflation in China was set to feed through.
The official myopia has not gone away. I think Merv's forecast for inflation is still optimistic, and believe that it will trend higher. I give a better than 50% chance that CPI will top 5% within a year.
Confused is right to be a little incredulous about exports - we will probably see a little boost to agricultural exports to europe, and possibly sell a few more bottles of Scotch, but it will probably be more than cancelled out (in terms of value) by the rising cost of imports.
Justwatching - the problem with raising interest rates is that they need to be sent to heaven if they are going to have any significant effect on inflation, something Merv probably realises. I have forecasted for years now that the inflation targetting policy will eventually be abandoned, and that day may be drawing near.
However, if there is not a margin between inflation and base rate, then that in itself is a recipe for more inflation, so rising inflation will force the BOE's hand. I would be surprised if they make another rate cut now, and expect the talk to be of a rate increase towards the end of the year.
Handle-it - no serious politician would try to make a case for the UK entering the euro now, it would do the country no good, and the public will never be persuaded - it just ain't gonna happen!
10. Stupid_boy_pike said...
Shouldn't the BoE not be pumping money into the banking system?
Doesn't this add to the inflation problem?
Shouldn't the secret bail-out system be withdrawn?
11. magnifico said...
UT you might well be right about the euro, but the language you use to cathegorically exclude the eventuality has a tint of the property's VI tones a year or so ago, when confronted with the suggestion House Prices may not always go up.
Thank you for the post Confused76, I never listened to The Governor at length, and his insight of the current economic situation has done quite a bit to make him go up in my estimation.
12. also sold to rent said...
As ever Mervyn is a beacon of professionalism. I have a lot of respect for him and never understand why he gets a hard time around here.
I think we are most likely to see an ECB style hold for a long time, probably followed by a raise when inflation doesn't come back to target. If you look at their CPI chart it shows how since 2005 it has only just touched 2% a couple of times and the rest of the time is above, so the average is over 2%. This shows that they have set rates somewhat too low in the past few years and Mervyn has already spoken on how this may eventually be a problem with inflation expectations.
I would be amazed if they abandoned interest rate targeting as soon as they ran into their first challenge. The next few years are exactly the kind of test that inflation targeting needs in this country to see if it works in the longer term.
13. it_is_going_with_a_bang said...
Exporting what exactly? The only thing we like to export is jobs.
14. Homeless_bear said...
I couldn't agree more with the comments above.
"This party's over . . . . I'm goin' home . . . "
Have a look at: http://news.bbc.co.uk/1/hi/business/7400074.stm
. . and the best quote (from Swervin' Mervin) . . . . .
"The MPC is facing its most difficult challenge yet. For the time being at least, the nice decade is behind us."