Spencer Dale: Inflation, inflation, inflation Speech by Mr Spencer Dale, Executive Director and Chief Economist of the Bank of England, at Cardiff Business School, Cardiff, 22 September 2010. *  *  *  I would like to thank Venetia Bell, Rohan Churm and Łukasz Rachel for their considerable help in preparing these remarks. The views expressed are my own and do not necessarily reflect those of other members of the Monetary Policy Committee. Introduction Thank you for the invitation to speak this evening. I studied for my undergraduate degree in economics at what was then University College Cardiff in the mid 1980s. I had three wonderful years in Cardiff and it is a huge pleasure to come back tonight and to see so many familiar faces. Although I hope some of those familiar faces will be kinder to my speech tonight than they were with my essays back then. The theme of my talk tonight is inflation. I hope that you won’t find that too disappointing. I fear that some of you were looking forward to a talk on more exciting topics like the financial crisis, the new responsibilities that have been granted to the Bank, the speculation concerning a double dip. But I make no apology for focussing on inflation. One of the cornerstones of our economy’s stable and consistent growth in the 15 years or so prior to the financial crisis was the period of low and stable inflation that was achieved then.
It is difficult to know exactly how much spare capacity there is in the economy and what its precise impact is on inflation. But that there remains some slack in the economy and this is likely to be pushing down on costs and prices seems clear. That impact should become more apparent as the temporary effects associated with the shocks to input prices and VAT wane. It is perhaps noteworthy that in the US and euro area, which have not experienced falls in their exchange rates or large movements in indirect taxes, core inflation has weakened substantially. The downside risks to the growth outlook, stemming in particular from the substantial fiscal consolidation now in train and the continuing constraints on the supply of bank lending, add materially to the downside risks to inflation. And even if the economic recovery does continue, it is possible that some of the factors that may have contributed to the surprising strength in inflation in the past may start to fade. As demand increases, companies may begin to bring mothballed capacity back on stream. And as firms build up their cash balances and credit becomes more available, margins may start to fall as companies seek to enter new markets and gain new customers. The risks to the inflation target are real and substantial. The job of monetary policy is to try to balance these upside and downside risks to inflation. In essence this is no different to normal, monetary policy is always faced with a balancing act.