UK: Deloitte Monday Briefing: The New Normal For Inflation

Last Updated: 19 March 2013
Article by Ian Stewart

Most Read Contributor in UK, August 2017

The Monday Briefing, written by Ian Stewart, Deloitte's Chief Economist in the UK, gives a personal view on topical financial and economic issues.

  • Five years after the onset of the Global Financial Crisis growth in much of the western world remains elusive.
  • Governments want to rein in spending and balance their budgets. The hope is that the private sector will drive the recovery.
  • In contrast to such orthodoxy on the fiscal side, monetary policy is being conducted in an ever more radical fashion.
  • Central banks have cut interest rates to record lows and have pumped huge amounts of liquidity into the economy through Quantitative Easing.
  • More subtly, the consensus around the primacy of low inflation in monetary policy is facing its greatest challenge.
  • The orthodoxy of the last 30 years is that the principal aim of monetary policy should be to maintain low inflation. Since the 1980s central banks throughout the West have been charged with keeping inflation down. In this task they have been highly successful.
  • But the period of low inflation before the recession was accompanied by booming house prices, soaring credit growth, frenetic financial innovation and rising income inequality. To the critics the focus on inflation-fighting blinded Central Banks to the risks brewing elsewhere.
  • Most Western Central Banks are operationally independent – they, not governments, decide monetary policy. But central banks operate in the real world, and this is a world where recession is more feared than inflation.
  • The consensus around controlling inflation that emerged in the 1980s was a reaction to the runaway inflation of the 1970s. In the same way the reaction to the Global Financial Crisis has triggered a growing consensus that monetary policy needs to do more to boost growth.
  • Such sentiment is affecting central bank policy.
  • In January the Bank of Japan adopted a new inflation mandate which requires the Bank to raise inflation to 2.0%; the Bank has made it clear it will flood liquidity into the system until this goal is achieved. Japan's new government has appointed a long term exponent of pro-growth monetary policies to head the Bank of Japan.
  • In the US the Federal Reserve in December committed itself to maintain near zero interest rates as long as inflation is forecast to remain below 2.5% and unemployment exceeds 6.5%.
  • The incoming Governor of the Bank of England, Mark Carney, has raised the possibility of a change in the Bank's remit, possibly to targeting nominal growth rather than purely inflation.
  • Last month Lord Adair Turner, the Chairman of the UK's Financial Services Authority and one of the leading candidates to be Governor of the Bank, argued the case for the printing of money to finance public spending and stimulate growth. This is a much more radical approach than the current policy of Quantitative Easing under which government bonds purchased by the Bank of England will, eventually, be sold back to the private sector.
  • The change in attitudes and in policy may be gradual, but is also significant. This can be seen in the increased flexibility with which the Bank of England is interpreting its remit. The Bank has loosened monetary policy over the last five years even though inflation has averaged 3.3%, well above the Bank's 2.0% target. Today the Bank forecasts that inflation is likely to remain above 2.0% for most of the next two years yet the Monetary Policy Committee seems far more likely to ease, than tighten monetary policy.
  • The Bank's focus on growth mirrors attitudes among the public and in government. Thus the Bank has faced much less criticism for presiding over above-target inflation than for the weakness of growth. Inflation seems to matter a lot less today than it did, say, 20 years ago.
  • The changing priorities of voters, governments and central banks may well usher in a new period of higher inflation.
  • That would mark a profound change. Inflation-focused central banks have been good news for savers and creditors, helping preserve their capital and giving them real returns from their savings. An era of higher inflation would be good for debtors - but a tough one for savers and creditors.


UK's FTSE 100 ended the week up 0.1%.

Here are some recent news stories that caught our eye as reflecting key economic themes:

  • UK industrial production unexpectedly weakened in January falling to a near 21-year low
  • UK property transactions reached their highest level in two and a half years in February
  • US retail sales grew by a stronger than expected monthly rate of 1.1% in February providing further evidence of a consumer recovery
  • The pound fell to its lowest level against the dollar in almost 3 years
  • The Irish government successfully completed its first sale of 10-year government bonds since its bailout in 2010
  • Eurozone finance ministers agreed a €10bn bailout package for Cyprus, including the imposition of a tax on depositors in Cypriot banks
  • The Norwegian oil fund – the world's largest sovereign wealth fund –significantly cut its holdings of UK and French government debt in 2012, whilst holdings of US, Japanese and German debt rose
  • The Italian economy contracted by 0.9% in the final quarter of 2012
  • German carmaker BMW announced 2012 as "the most successful year in BMW history", with a 10.6% increase in car sales
  • Supermarket group Tesco acquired the restaurant chain Giraffe for £48.6m
  • The UK Office for National Statistics has replaced champagne with white rum in its annual basket of goods used to determine inflation, reflecting declining levels of champagne consumption
  • Apple was fined €10,000 by the French government and banned from requiring staff at seven of its French stores to work night shifts as French law forbids shifts between 9pm and 6am unless the work plays an important role in the economy or is socially useful
  • Inditex, the world's largest fashion retailer and owner of Zara, reported a 22% rise in annual profits in the year to 31st January
  • Researchers at the University of Cambridge published a study that found a person's personality traits can be accurately predicted by analysing their Facebook "Likes" with, for example, liking curly-fries correlating with high-intelligence – food for thought

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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