In my remarks this evening, I hope to explain my understanding of what we mean by inflation persistence, and thus how it has and will influence monetary policy decisions. To emphasise from the outset: this is a personal view, not necessarily that of the Committee as whole. In presenting my interpretation, I will address four questions: Why focus on inflation persistence? What is inflation persistence? What drives inflation persistence? And what are the close-to-realtime indicators of inflation persistence on which the MPC is focused? In doing so, I will use one aspect of recent economic experience – specifically the adverse terms of trade shock to the UK stemming from higher imported energy prices – as a ‘case study’ to illustrate my points. By implication – and possibly to the disappointment of some of you – that means I won’t offer a comprehensive assessment of the UK economic situation and outlook in my remarks tonight. And, as a result, I won’t be giving any guidance about the immediate outlook for Bank Rate decisions, which necessarily depends on such an encompassing assessment. Rather my goal is to provide some further insight into the thought process that guides my vote at the MPC: if you like, the thinking behind my own ‘monetary policy reaction function’. Why inflation persistence? The transmission of monetary policy actions to developments in consumer price inflation famously operates with ‘long and variable lags’.
This applies along corporate value chains in transactions between intermediate good producers (sellers) and final good producers (buyers), just as it does in the labour market between employees (sellers) and employers (buyers). And the underlying distributional competition exists among workers – say between private and public sector employees, or between employees and the self-employed – just as much as much as within the corporate sector or between firms and workers. Monetary policy has neither the mandate nor the capacity to make fine distributional choices across these different groups. That is something better left to the market and/or the decisions of fiscal and regulatory authorities. Monetary policy is potentially a very powerful tool. But it is also a blunt tool – able to steer the aggregate level of spending in the economy over time in pursuit of price stability, but not to micro-manage a broad raft other economic challenges. The danger of over-burdening monetary policy with other objectives and thereby distracting it from its core task was recognised in the design of the MPC’s remit, with clear primacy attached to the achievement of the inflation target. Page 10  What monetary policy can, should and must do is steer the economy in a direction whereby these distributional bargaining processes are resolved in a way consistent with the 2% inflation target. An understanding of how monetary policy actions and their implications for aggregate demand influence the power and position of participants in the bargaining process is needed.