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Dr Andrew Sentance Former Member Monetary Policy Committee Take Five: 5 reasons to worry Take Five: 5 reasons to worry about UK inflation about UK inflation Presentation to M&G Inflation Conference Presentation to M&G Inflation Conference London, 4 October 2011 London, 4 October 2011
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Page 1: Dr Andrew Sentance Former Member Monetary Policy Committee Take Five: 5 reasons to worry about UK inflation Presentation to M&G Inflation Conference London,

Dr Andrew SentanceFormer MemberMonetary Policy Committee

Take Five: 5 reasons to worry Take Five: 5 reasons to worry about UK inflationabout UK inflation

Presentation to M&G Inflation ConferencePresentation to M&G Inflation Conference

London, 4 October 2011London, 4 October 2011

Page 2: Dr Andrew Sentance Former Member Monetary Policy Committee Take Five: 5 reasons to worry about UK inflation Presentation to M&G Inflation Conference London,

Reasons to worry about UK inflationReasons to worry about UK inflation

• Inflation performanceInflation performance

• Global inflationary pressuresGlobal inflationary pressures

• SterlingSterling

• Persistent services inflationPersistent services inflation

• The MPCThe MPC

Page 3: Dr Andrew Sentance Former Member Monetary Policy Committee Take Five: 5 reasons to worry about UK inflation Presentation to M&G Inflation Conference London,

UK inflation significantly above targetUK inflation significantly above target

Source: Office for National StatisticsSource: Office for National Statistics

% per annum increase in consumer prices index

Page 4: Dr Andrew Sentance Former Member Monetary Policy Committee Take Five: 5 reasons to worry about UK inflation Presentation to M&G Inflation Conference London,

UK economic growthUK economic growth

* Weighted average of manufacturing and services output* Weighted average of manufacturing and services output

% per annum change in economic activity

Page 5: Dr Andrew Sentance Former Member Monetary Policy Committee Take Five: 5 reasons to worry about UK inflation Presentation to M&G Inflation Conference London,

Employment in UK recessionsEmployment in UK recessions

Source: Office for National Statistics, Labour Force SurveySource: Office for National Statistics, Labour Force Survey

Index of employment, 100 = cyclical peak

Number of quarters from employment peak

Page 6: Dr Andrew Sentance Former Member Monetary Policy Committee Take Five: 5 reasons to worry about UK inflation Presentation to M&G Inflation Conference London,

Rebound in nominal demandRebound in nominal demand

Source: Office for National StatisticsSource: Office for National Statistics

% per annum change in key measures of nominal demand

Page 7: Dr Andrew Sentance Former Member Monetary Policy Committee Take Five: 5 reasons to worry about UK inflation Presentation to M&G Inflation Conference London,

High inflation squeezing retail volumesHigh inflation squeezing retail volumes

Source: Office for National StatisticsSource: Office for National Statistics

% per annum growth in retail sales (3-month ave)

Page 8: Dr Andrew Sentance Former Member Monetary Policy Committee Take Five: 5 reasons to worry about UK inflation Presentation to M&G Inflation Conference London,

Global inflation on the riseGlobal inflation on the rise

% per annum change in consumer prices% per annum change in consumer prices

Source: The EconomistSource: The Economist

Page 9: Dr Andrew Sentance Former Member Monetary Policy Committee Take Five: 5 reasons to worry about UK inflation Presentation to M&G Inflation Conference London,

Real oil and commodity pricesReal oil and commodity prices

Source: IMF and Thompson Datastream.Source: IMF and Thompson Datastream.

Deflated by US consumer price index; 2000=100Deflated by US consumer price index; 2000=100

0

50

100

150

200

250

300

350

1980 1985 1990 1995 2000 2005 2010

S&P GSCI Agriculture and Livestock index

S&P GSCI Industrial Metals index

Brent crude spot price

Page 10: Dr Andrew Sentance Former Member Monetary Policy Committee Take Five: 5 reasons to worry about UK inflation Presentation to M&G Inflation Conference London,

Global primary energy consumptionGlobal primary energy consumption

Source: BP Statistical Review 2010Source: BP Statistical Review 2010

Million tonnes oil equivalentMillion tonnes oil equivalent

2000

2500

3000

3500

4000

4500

5000

5500

6000

6500

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

OECD

Non-OECD

Page 11: Dr Andrew Sentance Former Member Monetary Policy Committee Take Five: 5 reasons to worry about UK inflation Presentation to M&G Inflation Conference London,

The rise of AsiaThe rise of Asia

*: Includes Australia, China, India, Indonesia, Japan, Malaysia, Singapore, South Korea, Taiwan Province of China and Thailand.*: Includes Australia, China, India, Indonesia, Japan, Malaysia, Singapore, South Korea, Taiwan Province of China and Thailand.

Source: IMF World Economic OutlookSource: IMF World Economic Outlook

Percentage share of world GDP, current market prices and exchange ratesPercentage share of world GDP, current market prices and exchange rates

0%

5%

10%

15%

20%

25%

30%

35%

40%

1980 1990 2000 2010

US EU-27 Asia-pacific G10 *

Page 12: Dr Andrew Sentance Former Member Monetary Policy Committee Take Five: 5 reasons to worry about UK inflation Presentation to M&G Inflation Conference London,

Shares of world GDP and populationShares of world GDP and population

*: Apac G10: Asia-Pacific G10, including Australia, China, India, Indonesia, Japan, Malaysia, Singapore, South Korea, Taiwan *: Apac G10: Asia-Pacific G10, including Australia, China, India, Indonesia, Japan, Malaysia, Singapore, South Korea, Taiwan Province of China and Thailand.Province of China and Thailand.

Source: IMF World Economic Outlook, World Bank and Eurostat.Source: IMF World Economic Outlook, World Bank and Eurostat.

2010 figures2010 figures

US, 23%

EU-27, 26% Apac

G10*, 27%

Other, 24%

GDP at market prices

US, 5%

EU-27, 7%

Apac G10*, 46%

Other, 43%

Population

Page 13: Dr Andrew Sentance Former Member Monetary Policy Committee Take Five: 5 reasons to worry about UK inflation Presentation to M&G Inflation Conference London,

Prospects for 2011 and 2012Prospects for 2011 and 2012

% per annum change in GDP, latest consensus forecast% per annum change in GDP, latest consensus forecast

* US, EU and 11 other major economies making up 85% of world GDP* US, EU and 11 other major economies making up 85% of world GDP

Source: The EconomistSource: The Economist

Page 14: Dr Andrew Sentance Former Member Monetary Policy Committee Take Five: 5 reasons to worry about UK inflation Presentation to M&G Inflation Conference London,

World economic growthWorld economic growth

* EU, US and 11 other economies accounting for 85% of world GDP* EU, US and 11 other economies accounting for 85% of world GDP

Source: IMF World Economic Outlook, April 2011, and The EconomistSource: IMF World Economic Outlook, April 2011, and The Economist

% per annum change in GDP in G-13 economies*

Page 15: Dr Andrew Sentance Former Member Monetary Policy Committee Take Five: 5 reasons to worry about UK inflation Presentation to M&G Inflation Conference London,

The global recovery in contextThe global recovery in context

% per annum change in GDP% per annum change in GDP

* US, EU and 11 other major economies making up 85% of world GDP* US, EU and 11 other major economies making up 85% of world GDP

Source: IMF and The EconomistSource: IMF and The Economist

Page 16: Dr Andrew Sentance Former Member Monetary Policy Committee Take Five: 5 reasons to worry about UK inflation Presentation to M&G Inflation Conference London,

Monetary policy, the global economy and Monetary policy, the global economy and inflationinflation

Global economy

Cost of imports

Demand

Pricing climate

Exchange rate

Domestic demand

Expectations and credibility

UK inflation

Impact of monetary policy

Page 17: Dr Andrew Sentance Former Member Monetary Policy Committee Take Five: 5 reasons to worry about UK inflation Presentation to M&G Inflation Conference London,

Sterling depreciation since 2007Sterling depreciation since 2007

Rebased to 100 in January 2005Rebased to 100 in January 2005

Source: Thompson Datastream and Bank for International SettlementsSource: Thompson Datastream and Bank for International Settlements

*: Effective exchange rate*: Effective exchange rate

70

75

80

85

90

95

100

105

110

2005 2006 2007 2008 2009 2010 2011

Euro-Sterling exchange rate

Sterling EER *

Average EER *, 97-07

Page 18: Dr Andrew Sentance Former Member Monetary Policy Committee Take Five: 5 reasons to worry about UK inflation Presentation to M&G Inflation Conference London,

Episodes of Sterling depreciationEpisodes of Sterling depreciation

Index, base year = 100Index, base year = 100

Number of years from start of periodNumber of years from start of period

Source: Bank for International SettlementsSource: Bank for International Settlements

50

60

70

80

90

100

110

0 1 2 3 4 5

1967-1971 1972-1977 1981-1986

1991-1996 2007-2010

Page 19: Dr Andrew Sentance Former Member Monetary Policy Committee Take Five: 5 reasons to worry about UK inflation Presentation to M&G Inflation Conference London,

Euro/UK inflation differential & exchange rateEuro/UK inflation differential & exchange rate

Source: Thompson DatastreamSource: Thompson Datastream

*: Euro-Sterling exchange rate is expressed as the deviation from its average over the same period.*: Euro-Sterling exchange rate is expressed as the deviation from its average over the same period.

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

1997 1999 2001 2003 2005 2007 2009 2011

Euro-area/UK CPI differential (RHS) *

Euro-Sterling exchange rate (LHS) **

Euro/ sterling %

Page 20: Dr Andrew Sentance Former Member Monetary Policy Committee Take Five: 5 reasons to worry about UK inflation Presentation to M&G Inflation Conference London,

UK goods price inflationUK goods price inflation

Source: Office for National StatisticsSource: Office for National Statistics

% per annum change in goods prices

Page 21: Dr Andrew Sentance Former Member Monetary Policy Committee Take Five: 5 reasons to worry about UK inflation Presentation to M&G Inflation Conference London,

Persistently high services inflationPersistently high services inflation

Source: Office for National StatisticsSource: Office for National Statistics

% per annum change in consumer prices

Page 22: Dr Andrew Sentance Former Member Monetary Policy Committee Take Five: 5 reasons to worry about UK inflation Presentation to M&G Inflation Conference London,

Reasons to worry about UK inflationReasons to worry about UK inflation

• Inflation performanceInflation performance

• Global inflationary pressuresGlobal inflationary pressures

• SterlingSterling

• Persistent services inflationPersistent services inflation

• The MPCThe MPC

Page 23: Dr Andrew Sentance Former Member Monetary Policy Committee Take Five: 5 reasons to worry about UK inflation Presentation to M&G Inflation Conference London,

Large official inflation forecast errorsLarge official inflation forecast errors

Source: Bank of EnglandSource: Bank of England

Mean of forecast percentage annual increases in consumer pricesMean of forecast percentage annual increases in consumer prices

0

1

2

3

4

5

6

2007 2008 2009 2010 2011 2012 2013

May-09 Nov-09

May-10 Nov-10

May-11 Actual CPI inflation

Page 24: Dr Andrew Sentance Former Member Monetary Policy Committee Take Five: 5 reasons to worry about UK inflation Presentation to M&G Inflation Conference London,

Unemployment in UK recessionsUnemployment in UK recessions

Source: Office for National Statistics, Labour Force SurveySource: Office for National Statistics, Labour Force Survey

Unemployment rate, % of labour force

Number of quarters from employment peak

Page 25: Dr Andrew Sentance Former Member Monetary Policy Committee Take Five: 5 reasons to worry about UK inflation Presentation to M&G Inflation Conference London,

Capacity utilisation in UK economyCapacity utilisation in UK economy

Source: Bank of EnglandSource: Bank of England

Bank of England Agents’ scores relative to normal

Page 26: Dr Andrew Sentance Former Member Monetary Policy Committee Take Five: 5 reasons to worry about UK inflation Presentation to M&G Inflation Conference London,

Wage growth picking upWage growth picking up

Source: Office for National StatisticsSource: Office for National Statistics

% per annum growth in private sector average weekly earnings

Page 27: Dr Andrew Sentance Former Member Monetary Policy Committee Take Five: 5 reasons to worry about UK inflation Presentation to M&G Inflation Conference London,

What is wrong with the MPC?What is wrong with the MPC?

• Policy-setting no longer consistent with 2% inflation target Policy-setting no longer consistent with 2% inflation target and mandateand mandate

• MPC seems prepared to inject more stimulus even when MPC seems prepared to inject more stimulus even when inflation is more than double target levelinflation is more than double target level

• Poor forecasting record, yet forecasts critically underpin Poor forecasting record, yet forecasts critically underpin current policy judgements current policy judgements

• Benign neglect of the poundBenign neglect of the pound

• No track record of taking tough monetary policy decisions No track record of taking tough monetary policy decisions to underpin credibilityto underpin credibility

• Dominated by internal consensus around GovernorDominated by internal consensus around Governor

Page 28: Dr Andrew Sentance Former Member Monetary Policy Committee Take Five: 5 reasons to worry about UK inflation Presentation to M&G Inflation Conference London,

ConclusionsConclusions

• UK inflation performance reflects structural problems in UK inflation performance reflects structural problems in current inflation target regimecurrent inflation target regime

• MPC has used its discretion to redefine inflation target MPC has used its discretion to redefine inflation target framework post-financial crisisframework post-financial crisis

• External members cannot effectively counter a strong External members cannot effectively counter a strong internal block dominated by the Governorinternal block dominated by the Governor

• There has been an overt policy of benign neglect of the There has been an overt policy of benign neglect of the pound, which has fuelled inflationpound, which has fuelled inflation

• UK monetary institutions and practice have an UK monetary institutions and practice have an inflationary bias – investors beware!inflationary bias – investors beware!


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