14  BIS central bankers’ speeches  Chart 13: Core inflation has picked up but remains notably below 2% 7 6 5 4 3 2 1  Per cent  12 month CPI inflation 12 month Core CPI inflation (a) Goods price inflation Services price inflation  0 -1 -2 -3 Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct 10 10 10 10 11 11 11 11 12 12 12 12 13 13 13 13 14 14 14 14 15 15 15 15 Notes: (a) CPI inflation excluding energy, food, alcoholic beverages and tobacco. Source: ONS. Measures of core inflation have been below 2% since the middle of 2014 (Chart 13), and weaker than projected in August. This mainly reflects weaker goods price inflation, which, in turn, is likely the product of sterling’s past appreciation (Chart 14).21 Those dynamics will continue to weigh on core inflation for a while, since around two-thirds of the effects of a currency move are estimated to appear in CPI inflation at horizons beyond one year, making them relevant for monetary policy strategy.22 Of course, the recent weakness in sterling, if it persists, will moderate these effects somewhat. 21  Note that one would not necessarily expect core inflation at 2% with CPI inflation at target if the items excluded from core inflation measures undergo persistent relative price shifts.
Consequently, last month the Financial Policy Committee (FPC) was able to send two signals that the system had turned the corner. First, it has clarified the overall capital framework for banks, providing much needed certainty to the sector. While there are details still to be finalised and complexities to be reduced, there  BIS central bankers’ speeches  1  is no new wave of capital regulation coming. There is no Basel IV. Indeed, last week, central bank Governors and Heads of Supervision agreed that work to address the problem of excessive variability in risk-weighted assets – one of the final parts of the post crisis capital framework – would be completed by the end of 2016 without significantly increasing overall capital requirements. Second, the FPC now judges that the system is already within sight of the amount of capital it needs to have by the end of the decade and has the capacity to continue lending to the real economy even under severe stress. The Bank’s most recent stress test underscores these improvements. It focused on an emerging market stress, centred on a sharp slowing of Chinese growth, which prompts reassessments of global economic prospects, falls in asset and commodity prices and increased global deflationary pressures.1 Sound familiar? Despite challenging conditions abroad, the UK financial system can continue to take the types of prudent risks needed to grow jobs and incomes here at home.