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Wednesday, 22 February 2012

Some Thoughts On The Bank’s Inflation Briefing

Dr Brian Sloan

This week I’ve been to the quarterly inflation briefing held by the regional office of the Bank of England. As always it was an excellent presentation, on this occasion delivered by the regional deputy Simon Caunt standing in for John Young. I am always struck at how few people attend the Manchester briefing given the standard of delivery and the information presented in a very digestible format. I can highly recommend it and it comes complete with great butties and a view from City Tower.

I had a few thoughts as Simon spoke. He said that there were some encouraging signs at the back of the ONS data release on unemployment. Interesting, but we are in the North West and both ONS and our own survey data show weak job creation and continued loss of public sector jobs across our region. The Bank expects recession to be avoided and that growth will pick up as a consequence of consumer spending, some business investment and exports.


We share the Bank’s view that recession will be avoided, but growth must come from business investment and cannot be dependent on consumers. The economy must rebalance away from consumption, but must be supported as it shifts. Consumers are still being squeezed by inflation at 3.6%, more than the 2.2% average wage rise, and lack confidence due to job security. Business investment is weak due to the uncertain economic outlook, and without investment large numbers of jobs are unlikely to be created. Exports have continued to see growth but now require a shift in business focus towards emerging markets, which will take time. The Bank seems to believe that US growth and demand will help, but largely unreported was the US Congress vote in January that saw the country increase its debt ceiling yet again, this time by $1.2 trillion to $16.4 trillion; the US has its own debt problems that at some point must unwind.

One other concerning fact emerging from the inflation report is the increase in the cost of funding for financial institutions that is making its way to businesses and consumers as higher interest rates on debt. My question would be, how will consumer demand respond to the increasing cost of debt? Still sitting on almost double the debt levels of the late 1980s, UK consumers started to repay that debt in 2008, though this came to a halt as the recession set in and inflation took hold. Low interest rates are enabling consumers to manage their debt, but for how long will this continue if growth does not return and interest rates start to rise? A weak Sterling, caused in part by the asset purchase programme, is also causing imported inflation for consumers and businesses. Whilst oil has not yet hit the dizzy heights of $140 per barrel in 2008, people will ask why fuel prices are so high? It is because the weakness of Sterling means the price of a barrel of oil to the UK is now over £70 per barrel, the price it reached in 2008, in fact at one point today it was over £76 per barrel! More costs for businesses and consumers alike.

Much is being placed on the consumer driving growth ahead, yet that is in some doubt. Our position is that more must be done to get the economy onto a longer term path of growth and to support the regional economies. Infrastructure investment could help deliver domestic growth in the regions, supporting jobs and consumer demand, better than the current asset purchase programme that results in inflation. We require infrastructure to support business confidence that it can invest and have the ability to move people and goods now and into the future.


Investing in this infrastructure now will help domestic growth to get people into work, stimulate business investment and enable growth in the years ahead. The Government needs to facilitate this investment by removing planning obstacles, ensuring that our young people are equipped with the rights skills and that excessive regulation, especially employment legislation, is addressed.

These are just some thoughts and by no means complete, but this is a blog. I hope this encourages people to sign up for and attend the Bank’s regional quarterly briefs and join the debate.

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