Bank of England's Lambert - "Why Is Inflation So Low?"
In an extremely dovish speech, former FT editor and BoE MPC member, Richard
Lambert today made a speech on the inflation outlook in the UK. The most
striking feature of the speech is that he underlines just how low targeted
CPI inflation currently is, how to us his words, inflation is both "LOW and
STABLE". This does mark a difference to Governor King who prefers NOT to be
explicit about this. CPI inflation is currently running at a 1.1% y/y
rate - well below the 2.0% target. King tries to talk of "recent" inflation
trends as "around" or "a little below" the target. Of course, Lambert is
only expressing the accurate empirical reality. CPI inflation is not only
well below target but actually much closer to the 1.0% lower limit - below
which King would have to write to Chancellor Brown explaining what steps the
MPC would take to bring inflation back within its target range. Lambert
states provocatively that, "So we are now getting very close to the point
where the Governor would have to exercise his letter writing skills."
A second question which Lambert asks is, "What might happen to inflation
over the next two years?” This is the most important question since it
covers the period over which the MPC is mandated to achieve the CPI target.
He considers two perspectives on this question. One approach - to which
Lambert clearly attaches the greater probability is that inflation
(remember, he has already described inflation as both low and STABLE) will
remain low. In this scenario, he outlines a wide variety of supportive
evidence. Firstly, he notes that UK domestic economic growth has likely
slowed in the second half of this year, under the pressure not just of
domestic but also global forces, which are unlikely to disappear any time
soon. As far as supply chain price pressures are concerned, he describes
these as follows, "industry's supply chain still looks quite muted." As for
the second scenario - where prices rise more sharply - he spends less time
here and clearly has less confidence in this perspective.
Lambert refers to two possible sources of inflationary pressure. First, the
fall
in the exchange rate and secondly the fall in market interest rates. In the
end, Lambert argues that the most important source of concern is the labour
market. However, he notes that, "The (labour) market still looks tight but
for some reason, it doesn't seem to be getting any tighter. At the same
time the pace of regular pay growth in both the public and private sector
appears broadly to have flattened out. Unit labour costs have dipped a
little and the labour share has if anything edged back a little."
Conclusion: This is not the speech that a man would make if he were going
to vote for a rate hike at next week's MPC meeting. The doves have
consolidated their control over the immediate policy agenda. |
