Bank of England message to inflation soothsayers … ease your storm

Storm Clouds

Don't believe the hype, is this week's message from the Bank of England.

As economic commentators line up to argue that the UK's economy is roaring, pumped as it is with central bank amphetamines, the top brass in Threadneedle Street claim they are being a little excitable.

Analysts are getting agitated about the prospect of rampant inflation because of the pressure on firms to increase output or push up prices. But the message from Ben Broadbent is calm down dear. He is the first of the monetary policy committee members out of the blocks this week in the race to convince central bank doubters.

He says put to one side the GDP figures and focus on unemployment. It may be a lagging indicator, but it tells you more about the pressure on supply from higher demand and, therefore, more about the pressure on prices. Other measures of supply have become unreliable.

"Changes in unemployment are now a more reliable measure of what's happening to the degree of slack in the economy than economic growth alone," Broadbent argues. GDP can grow and there still be slack, goes the argument.

At its most simplistic, without higher unemployment, the UK cannot have higher wages. Without higher wages inflation will not run away to an extent that it cannot be confronted with policies – like an increase in interest rates – that dampen demand.

So interest rates only rise when unemployment falls significantly and wages climb, which is fine, because then we can afford higher rates.

Powered by Guardian.co.ukThis article was written by Phillip Inman, for The Guardian on Monday 23rd September 2013 19.00 Europe/London

guardian.co.uk © Guardian News and Media Limited 2010

 

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