Bank of England quarterly inflation report summary

by Neil Patterson

11:36 AM, 14th February 2014
About 7 years ago

Bank of England quarterly inflation report summary

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Bank of England quarterly inflation report summary

No need to panic about interest rate rises as we are still in a bad place, but an improving place economically.bank_of_england

Yes “Forward Guidance” is dead because the Bank of England got their unemployment prediction wrong, but we still don’t really know why.

Unemployment dropped to 7.1% from 7.7% in three months making redundant the figure of 7% unemployment being any kind of trigger for looking at the bank base rate. This drop is statistically unprecedented being 4 times more than any previous drop for the same level of growth!

However Forward guidance could be said to have been a success by giving confidence for the economy to grow with GDP increasing by 0.7% in the 4th quarter. Forward Guidance was largely understood to have a stabalising effect by the business industry even if it wasn’t by households and popular press.

The irony is that the growth was largely caused by household spending even though incomes are stagnant and not any productivity increase, although construction figures have recovered.

BofE Household spending

This growth in household spending on goods and services could be pent up demand from previous years de-leveraging household debt. Eg a new car purchase may have been put off since the credit crunch, but now it is getting older and more expensive to run people are now making those purchases. This type of growth is not sustainable in the long term and is why the Bank of England are cautious about the future recovery especially with heavy economic headwinds from European demand falling.

We are still buying more from abroad and with European growth stalling and hence demand for our goods and services so our trade deficit is actually worsening. It is the strength of the Pound, which although having a positive effect on keeping external inflation lower, is making our exports less attractive. This is the age old economic conundrum that what is good for one part of the economy is usually bad for another.BofE Tradedeficit

 

 

Looking forward The Bank of England believe there is still a lot of spare capacity in the labour market and that is what should be targeted to see a sustainable improvement in growth. What they mean is that on average workers are underemployed and could be more productive. During the recession output dropped by a far greater ratio than employment and especially considering the recent figures on unemployment there must be spare capacity for employees to be more productive.

 

It is this spare capacity that the Bank of England are going to be carefully monitoring and targeting for any future decisions on monetary policy. The Bank of England believe that the natural level for unemployment is around the 5% point and that we are unlikely to see too much wage lead inflation before this is reached.

BofE Labour Productivity ChartSo in summary the good news is that the main target figures of growth at 2% and inflation at 2% are on target, but productivity is slow and the trade deficit is increasing. Therefore there is no short term requirement to dampen a fragile recovery by increasing interest rates and if there is any need to do so in the medium term it would be by very gradual small amounts.

BofE GDPchart

 


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Comments

Mark Alexander

12:11 PM, 14th February 2014
About 7 years ago

Well Neil, you will be pleased to know that I read your article right to the end this time and I actually understood it too.

I can't believe I'm saying this but I actually found it quite interesting too.

Now the question I have is this; am I getting more intelligent or are you getting better at writing articles so that normal people like me can actually understand them? 🙂
.

Neil Patterson

12:24 PM, 14th February 2014
About 7 years ago

Reply to the comment left by "Mark Alexander" at "14/02/2014 - 12:11":

I will take that as a compliment I think 🙂

Carol Thomas

15:58 PM, 14th February 2014
About 7 years ago

Very clear and easy to understand, thanks Neil.

Cristian Stoian

22:10 PM, 14th February 2014
About 7 years ago

As I see it, the key issue is how sustainable this recovery is ? As pointed out by Neil, "growth was largely caused by household spending even though incomes are stagnant and not any productivity increase".

So recovery was/is driven by household spending, but household spending is driven by, err, nothing ? To me this recovery does not have a sound foundation that I can identify, so I am very cautious.

One can obviously ask why then households spend more ? Because house prices went up. And why did they go up ? Because the cash buyers are forced to invest some of their money in property, and because foreign buyers are pushing London prices through the roof.

Colin Childs

10:31 AM, 15th February 2014
About 7 years ago

"Yes “Forward Guidance” is dead because the Bank of England got their unemployment prediction wrong, but we still don’t really know why."

A forecast can only ever be based on assumptions relating to a multitude of factors. As an example a corporate entity will revise it's detailed 3 month cashflow forecast every month. The factors which impact the forecast are outside the entitys direct control.

Carney’s “simplification”did its job. It has given businesses and households the confidence to invest or spend, and despite the fastest rate of job creation on record, future rates expectations have remained well anchored.

Polly Nottingham

11:27 AM, 15th February 2014
About 7 years ago

Interesting article from Neil, thank you.

On the side-issue of the rapid rate of fall in unemployment...

It is worth remembering that 'unemployment' is actually only those who are recorded as claiming benefits. So if a government causes the DWP to tighten up the rules, barring claimants from benefit for infringements such as turning up 2 minutes late, not applying for enough jobs etc that can have a significant impact on the number who are then eligible to claim unemployment benefit.
Those people would still exist, would still be unemployed, but would not appear on the government figures...

Remember 'Lies, damned lies and statistics'

Jeremy Smith

17:38 PM, 15th February 2014
About 7 years ago

Reply to the comment left by "Polly Nottingham" at "15/02/2014 - 11:27":

You don't know how right you are Polly, or maybe you do !!

- A friend of mine has cause to visit the DWP offices on a regular basis, she has been stopped her benefit for being late, 10 minutes late.
- The 'little hitler' who decides when she needs to turn up for her job search deliberately put her time for this at the same time as her signing on time, so no way can she turn up on time !!
-She has protested to higher officers, and eventually got the time changed, but not until she has already been stopped her benefit for 4 weeks.

She tells me, some weeks they sanction loads of people for minor things, and other weeks, they 'let them off' - she says they have targets to meet, so are sometimes more strict.
These people are mostly the ones who don't know how to fight back or who to turn to for help, so just give in and struggle on.

I wonder from how high up these 'dictates' come, to sanction people for anything they can pick on.

Neil Patterson

9:31 AM, 17th February 2014
About 7 years ago

Reply to the comment left by "Polly Nottingham" at "15/02/2014 - 11:27":

Hi Polly,

I did not go into it for fear of sending Mark to sleep, but a factor you have recognised is actually statistical fact.

The average consistent percentage over the last 20 years of people in part time work because they could not get full time work was 3%, but that has recently increased to 5%. This does not sound like a lot but it is a 66% increase. There are also no statistics on the huge numbers of people who were made redundant and started new businesses becoming self employed.


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