Tuesday, October 26, 2004

In its uniquely reserved British style, the Bank of England is ramping up the deflation early warning system.
A member of the Bank of England's rate-setting Monetary Policy Committee (MPC) has given the first public indication that the Bank's Governor may soon have to explain to the Chancellor why inflation is so low and what the Bank intends to do about it. . . .

Every year the Chancellor sets a target rate for Consumer Price Index inflation which guides the MPC in setting interest rates. If the actual inflation rate goes above or below the target by more than one percentage point the Governor has to explain. It is currently 1.1 per cent compared with a target of 2 per cent.

Mr Lambert said: "House price inflation seems to be on the turn, and the pace of spending on the high street may cool off more rapidly than had been expected. It now seems unlikely that economic growth in the third and fourth quarters of this year will match the very strong performance of the second, so the pressure of demand may turn out to be less intense than might have been expected. Moreover, the trend of prices in industry's supply chain still looks quite muted." . . .

Mr Lambert noted that inflation was being held back by a "brutal" retail climate, while low unemployment was not pushing up wage rates as might have been expected. He said: "The employment rate has slipped a little, and the level of inactivity has risen. The number of average hours worked has declined, but for some reason the market 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."

Mr Lambert admitted that it was hard to explain this apparent change of mood. But that inflation was set to remain low and stable in the UK despite violent swings in the prices of individual goods and services.
What better expression of the fact that deflation in the advanced capitalist countries is now structural?


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