The Bank of England’s latest quarterly Inflation Report was published on November 11. With all the gloomy news over the past few months the report is pleasantly up-beat – certainly for the longer term. As Mervyn King, Governor of the Bank of England, states in his opening remarks to the publication of the report, “The considerable stimulus from the past easing of monetary and fiscal policy and the depreciation of sterling should lead to a recovery in economic activity.”
Nevertheless, recovery will be slow, especially at first. This means that it will be some time before output returns to pre-recession levels. “Despite a recovery in economic growth, output is unlikely, at least for a considerable period, to return to a level consistent with a continuation of its pre-crisis trend. That is in large part because the impact of the downturn on the supply capacity of the economy is expected to persist. But it is also because there is likely to be sustained weakness of demand relative to that capacity.”
There is surprisingly good news too on employment and unemployment. Although unemployment has risen sharply in recent months, the rate of increase is slowing and “There was a small increase of 6000 in the number of people in employment to 28.93 million, the first quarterly increase since May–July 2008 (see Labour market statistics, November 2009).
So should we be putting out the flags? Can the Bank of England ease off on quantitative easing (see Easing up on quantitative easing)? Or does it still need to keep on increasing money supply, especially as fiscal policy will have to get a lot tighter? The following articles consider the issues.
Mervyn King: economy remains ‘uncertain’ (video) Channel 4 News, Faisal Islam (11/11/09)
Bank of England governor dampens hopes of swift UK recovery Guardian, Graeme Wearden (11/11/09)
Recovery has only just started, warns sombre King Guardian, Heather Stewart (11/11/09)
Cautious good cheer BBC News, Stephanomics (11/11/09)
Bank of England’s Mervyn King says UK only just started on recovery road Telegraph (11/11/09)
The Bank of England’s Inflation Report is useless. Here’s why. Telegraph, Edmund Conway (11/11/09)
Bank of England raises growth and inflation forecasts: economists react (includes video) Telegraph (11/11/09)
Bank of England talks up hopes of strong recovery Times Online, Robert Lindsay (11/11/09)
Bank of England cautions on economic recovery BusinessWeek, Jane Wardell(11/11/09)
Just who benefits from quantitative easing? WalesOnline (11/11/09)
Inflation Report: Forget the fan charts, what we need is a clear economic policy Telegraph, Jeremy Warner (11/11/09)
We’ve no choice but to keep inflating Independent, Hamish McRae (11/11/09)
Is there a break in the economic gloom? (video) BBC Newsnight, Paul Mason (12/11/09)
The Bank of England Inflation Report can be found at the following site, which contains links to the full report, the Governor’s opening remarks, charts, a podcast and a webcast:
Inflation Report November 2009 Bank of England
Questions
- Explain what the three fan charts, Charts 1, 2 and 3 on pages 6, 7 and 8 of the Inflation Report, show.
- Why is the Bank of England more optimistic than in its previous report (August 2009)?
- Why did the sterling exchange rate fall on the publication of the report?
- Has the policy of expansionary monetary policy proved to be beneficial and should the Bank of England continue to pursue an expansionary monetary policy?
- What determines the balance of effects of an expansionary monetary policy on (a) asset prices; (b) real output; and (c) inflation?
- How have relatively flexible labour markets affected the impact of recession on (a) wage rates; (b) unemployment?
You may ask how on earth bins are related to the post. The simple answer is that these are two things that may not be collected. They say that one wedding brings on another, but it looks like that this also applies to strikes. The Winter of Discontent in 1978-9 saw widespread industrial action, where the country almost came to a stop. Is this really where we are now?
The postal strike has been widely publicised, but it’s not just your post that may not arrive. Bus drivers have been striking against First Bus in Greater Manchester and various other places following pay freezes. British Airways is to face the possibility of strike action over new contracts, working practices and pay freezes after talks broke down. The Spanish company Iberia had to cancel over 400 flights over two days due to protests, and in Leeds, rubbish hadn’t been collected for eight weeks.
So, what’s causing all of this discontent? Are we going to see more and more workers protesting over contracts, hours of work and notably pay?
One key thing about strikes is that they affect everyone, whether it’s walking past piles of bin bags; not receiving birthday cards; getting to work late; cancelling holidays or receiving fines for late payment, and even for not submitting your tax returns. These are all problems that people have been facing, not to mention the loss of income some businesses have seen, especially resulting from the postal strike. With the government looking to reduce public-sector debt by increasing taxes or spending cuts, including public-sector pay freezes and controls on banking bonuses, we could be in for another winter of discontent with further disruptions to come.
Articles
Questions
- What is the purpose of a strike and how effective are they likely to be? What are the costs?
- One of the reasons for strike action is pay freezes. What happens in an individual labour market when pay is frozen? What happens to the demand and supply of labour? Illustrate your answer with a diagram.
- Some news articles have referred to ‘picket lines’ forming. What are they?
- What is the difference between collective bargaining and individual bargaining? Which is more effective?
- Illustrate on a diagram the effect of a trade union entering an industry. How does it affect equilibrium wages and equilibrium employment? Is there any difference if the trade union faces a monopsonist employer of labour?
- Do you think the strike action is right? Why or why not? What are the things you have considered?
- Discuss whether we are heading towarads another ‘winter of discontent?’ Can it be stopped?
Most students have a student loan: you need it to live; to buy text books; to survive. So, what do you do if your student loan hasn’t appeared in your bank account? This is a problem that many students have been facing. The Student Loans Company said that even after most courses had started, 175,358 students had still not had their loan application processed. This represented 16% of applications. There are various reasons given for this delay, but one that appears more often is the current economic downturn. This has been a crucial factor in so many students being without the necessary finance to begin university. Another reason is that many documents have been misplaced. On the other hand, a spokesman for the Student Loans Company (SLC) said that actually delays this year were no worse than in previous years, even though this is the first year when students applied directly to the SLC. Does this suggest that actually the whole system of student loans is still inefficient and needs to be overhauled again? Is there a better method?
In order to help students, many universities have made emergency payments to those without their loans. What’s the opportunity cost of this money? Surely it could be used for other purposes. Universities have seen their highest ever number of applications, although there has been a drop in Scottish student numbers and there are suggestions that tuition fees will increase again. What are the implications of the problems with student loans and the massive increase in university applications?
Minister ‘sorry’ for student loan delays ePolitiX (15/10/09)
140,000 miss university places The Press Association (17/10/09)
Student loan firm explains delays BBC News (12/10/09)
Student loan delay hits 175,000 students Telegraph, Graeme Paton (9/10/09)
Enquiry to be held over late payments of student loans Guardian, Jessica Shepherd (13/10/09)
Watchdog fears over poor students BBC News (29/9/09)
Student tuition fees could increase Telegraph, Graeme Patton (14/10/09)
Student debt to soar Daily Express, Alison Little (14/10/09)
Questions
- Why has the recession had an impact on university applications?
- Should universities be able to set their own fees? What are the advantages and disadvantages of such a system? How could fees be determined?
- Primary and Secondary education is a merit good and free in the UK. What do we mean by a merit good and how can we illustrate the positive externalities associated with education? Why is higher education not free to the student? Aren’t there positive externalities associated with it?
- If tuition fees increase, student debt levels after graduation will be higher. What is the likely impact of this on the students themselves and on the economy?
- What the likely consequences for (a) students (b) universities of the delays in student loans?
Gold prices have been soaring in recent months. In fact, such is the demand for the precious metal that Harrods has just started selling gold bars. “The Knightsbridge department store yesterday began selling bars of pure Swiss gold bullion as part of a range that is being displayed in a miniature vault on the lower ground floor” (see eighth link below).
In November 2008, gold was trading at around $750 per ounce; by October 2009, the price had reached $1080 per ounce. Why has this happened? Will the trend continue? What does it signify about the world economy – both its current and likely future state? The following articles look at the causes and effects of this new ‘golden age’.
Gold prices continue to hit new highs Guardian (7/10/09)
Gold price hits fresh high Guardian (14/10/09)
Gold’s bull run set to roar ahead This is Money (17/10/09)
Why the price of gold is rising BBC News (13/10/09)
Gold price ‘set to double in four years’ (includes video) Telegraph (10/10/09)
Gold at $1,500? Don’t hold your breath Telegraph (10/10/09)
Bullion bulls The Economist (8/10/09)
Harrods put Swiss gold bars up for sale in a miniature vault Times Online (16/10/09)
Gold Eases from New High as “Less Bad” Data Drives Up Equities, Oil & Wall Street Bonuses BullionVault (14/10/09)
Gold Just Broke Its Neck, Targets $5,250? The market Oracle (14/10/09)
Questions
- Use a demand and supply diagram to illustrate the change in the price of gold between November 2008 and October 2009. Does the explanation lie largely of the demand or the supply side? Use the concepts of price elasticity of demand and supply to explain the size of the price change for any given shift in demand or supply.
- How is the price of gold related to the strength of the US dollar?
- Explain whether gold is a commodity or a currency (or both).
- What is meant by the ‘head and shoulders pattern’ in the price of gold? Is the use of ‘patterns’ a good way of predicting future prices? Give reasons why it may or may not be.
CPI inflation in the 12 months to September 2009 fell to 1.1% (from 1.6% in the 12 months to August). RPI inflation for the same period was -1.3%. In other words, retail prices actually fell by 1.3% in the 12 months to September. According to the ONS, “By far the largest downward pressure affecting the change in the CPI annual rate came from housing and household services. This was principally due to average gas and electricity bills, which were unchanged between August and September this year but rose a year ago when some of the major suppliers increased their tariffs.” (See below for link.)
If the CPI inflation rate falls below 1% (or rises above 3%), the Governor of the Bank of England is required to write a letter to the Chancellor of the Exchequer explaining why and also what the Bank of England intends to do about this. The Bank of England targets the forecast CPI inflation 24 months’ hence and attempts to achieve a rate of 2%. Normally, if the forecast rate is below 2%, the Monetary Policy Committee will decide to cut the rate of interest. The last Bank of England Inflation Report (August 2009) forecast CPI inflation of around 1.5% in 24 months’ time. If the November Inflation Report forecasts a similar figure, or even below, what can be done? Bank Rate is already at a historic low of just 0.5% and a further cut is unlikely to have much effect. Should the Bank of England, then, engage in another dose of quantitative easing? Perhaps the letter, if it has soon to be written, will make it clear.
UK consumer price inflation at 5-year low BusinessWeek (13/10/09)
Recession helps push inflation to five-year low Independent (14/10/09)
Inflation falls to lowest in five years Guardian (13/10/09)
Inflation dip likely to be short-lived Guardian (13/10/09)
Deflation, not inflation would be the bigger threat if the Conservatives do what they say Jeremy Warner blog, Telegraph (13/10/09)
Pound hit by falling UK inflation BBC News (13/10/09)
Pound hit by falling UK inflation (video) BBC News (13/10/09)
Pound pays price as inflation slides to five-year low Times Online (14/10/09)
Investors weigh risks of inflation and deflation Financial Times (12/10/09)
Wage ‘catch up’ for public sector BBC Today Programme (14/10/09)
Current data on UK Inflation (National Statistics)
Time series data (annual, quarterly and monthly) on UK prices and inflation Economic and labour Market Review (National Statistics)
Questions
- Why did the annual rate of CPI inflation fall so much in September 2009?
- Is the Bank of England Governor likely to have to write a letter (or letters) to the Chancellor in the coming months? Explain why or why not. What is likely to be the role of expectations in determining whether a letter has to be written?
- Why did the sterling exchange rate fall on the announcement of the inflation figure? What are likely to be the effects of this? What will determine the size of these effects?
- Why may additional amounts of quantitative easing be necessary in the coming months? How would a contractionary fiscal policy affect the desirability of additional quantitative easing?