Bank of England Admits Currency Depreciation Contributing to Stubborn UK InflationPosted: May 20, 2012
Inflation in the United Kingdom has been stubbornly and persistently high since the recession ended – it is currently 3% and above the Bank of England’s (BoE) target of 2%. The UK has been unique amongst the major economic partners in experiencing high inflation and slow growth since the recession. Through this period the BoE has insisted that it expects inflation to eventually (and soon) decline towards target. Every year that passes without the target getting hit, produces another year of frustration and impatience. Now that the UK has recorded two quarters of negative GDP growth, stagnation has descended upon the economy.
In last week’s Inflation Report, the BoE made an admission I do not think I have heard before. A reporter asked the expected and on-going question about the inflation problem. A BoE member answered that the depreciation of the British pound has contributed to driving inflation higher than expected. He noted that the BoE expected currency depreciation to behave as it did in the 1990s when it seemed not to contribute to inflation. Instead, the UK is getting the experience of the 1970s and 1980s. There was no discussion about the lessons learned or what features of all these periods are similar or different. However, I think this is huge progress that at least the BoE has officially recognized that a less valuable currency can still contribute to high inflation.