Inflation

The sterling exchange rate has now declined by about 7 per cent this year, thus eliminating all of the rise which occurred when the euro crisis was in full flood in 2011-12. Investors are asking three main questions about the drop in sterling. When will it end? Will it succeed in boosting UK economic growth? And could it, conceivably, lead to a full blown sterling crisis? Read more


Ben Bernanke has been very focused on the Fed’s “communications strategy” for several years now, and has patiently pushed the FOMC in his desired direction during a series of detailed discussions. Now it seems that he has reached his destination, and will reveal all (or almost all) in his press conference after the FOMC meeting which begins on Tuesday. Always a fan of explicit inflation targets, the chairman seems finally to have won agreement from colleagues on establishing a formal objective for core inflation of about 2 per cent, though the FOMC will also need to keep Congress happy by talking about its long term unemployment objectives as well. More unconventionally, each member of the FOMC will also publish for the first time their projections for the Fed funds rate extending to 2016.

What is the motivation behind these changes? Mr Bernanke has normally justified such steps in terms of stabilising expectations about the Fed’s genuine intentions, especially on inflation and the forward path for interest rates. At a time when the extension of the balance sheet is causing political difficulties for the Fed, and when inflation expectations could become unhinged by the rapid expansion of the monetary base, the chairman is looking for alternative ways of easing monetary conditions without printing more money. Modern macro-economics suggests that operating on expectations is one of the most powerful tools available to him, though he is using it much more cautiously than many economists would like to see. Read more

The recent fall in equities represents a belated recognition by the markets that the global economy has been much weaker than consensus economic forecasts indicated earlier in the year. Unlike last summer, when the same thing happened, the markets have also begun to recognise that policy makers have little ammunition left in the locker to combat the downturn.

The political will needed to ease fiscal policy, even temporarily, has evaporated on both sides of the Atlantic. And monetary policy has been hamstrung by the rise in inflation, which has clearly changed the thinking of the Fed. So where is the escape route? Read more

The Bank of England’s latest Inflation Report was certainly a downbeat document. Mervyn King, Bank governor, said there are “difficult times ahead”, because the economy is still undergoing a slow adjustment to the impact of the financial crisis. By reducing its GDP growth forecasts while simultaneously increasing its inflation projections, the Bank has signalled that it believes the UK is now facing a series of supply side problems – and those are always the most difficult for any central bank to handle. Read more

Normally, I write a summary of the week’s major economic events on a Sunday morning. This week I am going to leave the heart-rending events in Japan to be covered by the news teams, and instead focus on two other developments which have important ramifications for the global economy – the slowdown in China, which is becoming increasingly accepted by a previously sceptical economics profession; and the moderately promising deal on sovereign debt which was announced by EU leaders in the early hours of Saturday morning. Read more

The era in which central bankers could apparently do no wrong ended emphatically in 2008. Since then, they have attracted plenty of criticism as they have adopted a succession of unconventional policies to stabilise the world economy and financial system. Read more

Ben Bernanke’s speech in Boston on Friday seems to have disappointed those who were expecting him to announce concrete measures to restart quantitative easing, but we already knew from the last set of FOMC minutes that the groundwork for such an announcement had not been undertaken. That announcement will come after the committee’s next meeting on November 2nd and 3rd. Nevertheless, Mr Bernanke has nailed his colours to the mast, even more clearly than he has done in recent speeches. This is a Fed Chairman who is very dissatisfied with the depressed state of the US economy, and who is not afraid to say so. Read more

The minutes of the September meeting of the FOMC, published yesterday, suggest that the Fed is considering how to communicate its policy message more clearly to the markets.  Read more

The Federal Reserve broke a taboo yesterday when it said quite baldly that inflation in the US is now below the level “consistent with its mandate”. In other words, it is too low. This is a very big statement for any central banker to make, since the greatest feather in their collective cap is that they successfully combated inflation after the 1970s debacle.  Read more

Ben Bernanke’s speech at Jackson Hole on Friday will reportedly discuss the pros and cons of further monetary easing in the US. This debate has suddenly taken on a new sense of urgency, because the weakening in US economic data seems to have accelerated quite markedly during August.  Read more

The battle to avoid deflation in the developed world could prove to be a long one, with twists and turns which could last for many years. In July, the core CPI data in the eurozone were somewhat firmer than expected, as were the core PPI data in the US. This has led some economists to suggest that underlying price pressures are beginning to rise again, and that the deflation scare is over. Would that that were true. Some interesting new evidence from the IMF suggests that while outright deflation might be avoided, at least for a time, the developed economies could soon get stuck in a kind of limbo land, with inflation remaining unhealthily close to zero for a very long period. Read more