The Guardian has a rather useful write-up of what Andrew Bailey, Governor of the Bank of England, had to say to the Treasury Committee of the House of Commons yesterday.
As they note, he said:
The biggest single reason inflation has risen to that level is the war in Ukraine. It is also the most likely reason that we're going to see a rapid fall in inflation in the year ahead, because we are not seeing energy prices rising further. In fact, they're coming down.
I have, of course, already noted this phenomenon.
As a result the Guardian noted:
Bailey told MPs on the Commons Treasury committee that the UK's rate of inflation could fall back substantially this year.
Again, there is no surprise here: anyone with the bank of an envelope could work this out for themselves. However, the reason is not falling energy prices: stable energy prices would be enough to deliver this phenomenon. Falling prices might well lead to deflation in 2024.
But what the report does not address is why, as a result, interest rates are still expected to go up. It seems that issue was not on the agenda.
I will be explaining that in a report coming very soon, but as a teaser, simply think quantitative tightening and get to work on the back of that same envelope.
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The Fed Rules, OK?
The Fed still expected to raise US interest rates (see link)…
while UK Y-O-Y CPI still running at over 10%.
These factors combined with sterling still a bit jittery from the Truss /Kwarteng debacle, makes the pound vulnerable, and thus prices of imported food, which is a major input to UK’s latest 16.5% annual food inflation rate.
Bailey might be a bit slow to lower UK interest rates until “the competition” (in interest rates of other major trading partners) has leveled out.
https://www.bankrate.com/banking/federal-reserve/how-much-will-fed-raise-rates-in-2023/#:~:text=The%20Fed's%20key%20benchmark%20borrowing,Fed's%20median%20projection%20from%20December.
Bailey referred to none of those issues, and rightly so
Your ‘analysis’ wholly misses the point
Inflation is looking backwards; Interest rates cover future periods.
1 year rates in the UK are 4%, price rises (in 2023) will be about 2% (in VERY rough numbers). So, real rates are +2% and this will drag on the economy. That, combined with austere fiscal policy is a recipe for misery for many.
Now, there is no policy that will deliver paradise but current policy is making a difficult situation worse.
…. and with regard to the Fed…. two things
First, thinking evolves as time moves on. Markets suggest that the Fed will not be as aggressive as they once thought.
Second, are you proposing that we run UK monetary policy with an Exchange rate target?… because that is your implication.
And if so that is absurd
But it also says the first thing to do is cancel Brexit….
@Clive Parry.
“Second, are you proposing that we run UK monetary policy with an Exchange rate target?… because that is your implication.”
If imported food prices contribute significantly to inflation when there is a fall in sterling, isn’t it reasonable to match UK with global interest rates to mitigate this?
No
Fuel price changes will already largely deal with this
And then reduce dependency