Inflation
Consumer Price Inflation
UK Trends
– Periods after both world wars were periods of high inflation due to the financing of war expenditure and Keynesian demand management. In the 60’s/70’s inflation was volatile from Keynesian policy
– 1810s-1890s there was decline in price level due to globalization, gold standard and strong economic growth
– Spikes in inflations in late 70s from oil shocks
– 1980s monetary targeting (controlling the money supply) was key to lowering inflation and reducing interest volatility.
– 1992 when inflation targeting was adopted also led to less volatile inflation
Its uncertain how much inflation targeting actually works as Germany and France pre Euro had lower inflation than the UK and now in the Euro they do use inflation targeting and they have achieved lower inflation and less volatility.
Inflation recently has been low and stable:
– 2007 was first time a letter was written as didn’t meet the target
– Inflation overshot in 2008 and 10/11
– Inflation undershot in 2014-2016
– Since spring 2017 has been around 3%
– The MPC have failed to identify surges inflation and the fall in 14/15
Historically a link between broad money growth and inflation however since 80’s inflation has been lower than broad money growth likely due to globalisation which pushes down prices through imports, competitive wages and interest rates.
Inflation Expectations
– Since mid 80’s there has been a decline in inflation expectations
– When BoE went independent fell further to the target (due to increased credibility in BoE)
– From 1999 inflation expectations close to 3% even when there has been very low or no inflation like in 2015/16
– Since 2016 expectations have gone above 3%
House Price Inflation
a large increase in global labour supply (4x between 1930-2005 but largely post 1990) has led us to import more goods from low cost economies.
-Low cost imports has relieved inflation pressures which many thought was due to BoE.
-Recent rises in commodity prices has offset this dampening of inflation
-Money and credit has increased massively in developed world since mid 1990s which has led to lots of speculative bubbles. This along with excessive growth in money supply led to bubbles such as the dot com bubble and the house price bubble:
-At peak of recent house price bubbled UK’s house price to rent ratio was 50% above average which was higher than both Japan and USA at their peak bubbles, and than the previous UK bubble in 1980s. In 2016 was still almost 50%
-since 1990s the UK’s debt to income ratio has increased mainly due to mortgages. It is much larger than US in their bubble and generally