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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (13988)	10/25/2004 11:43:07 AM
From: zonder	Read Replies (2) \| Respond to of 116555

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.