Article 34GC Inflation is low now, but it won’t stay that way. The Bank is ready to act

Inflation is low now, but it won’t stay that way. The Bank is ready to act

by
Martin Weale
from on (#34GC)
I was one of those voting for an interest rate rise last year. Now the risks have changed - but the resolve of the MPC has not

Mark Carney, the governor of the Bank of England, wrote to the chancellor last week to explain why inflation fell to 0.5% in December, significantly below the monetary policy committee's target of 2%. As one of the nine policymakers on the monetary policy committee (MPC) at the bank, I had been voting for a rate rise since August but the news about December's inflation led me to change my vote in January.

As the governor explained - and not surprisingly - the single biggest explanation of very low inflation is the decline in the price of oil. Since the inflation rate is measured by looking at the change in prices over 12 months, inflation is likely to stay very low until the sharp fall in oil prices lies more than a year in the past. In fact, because not all prices adjust as rapidly as does petrol, the impact is likely to linger for longer than this.

It is suggested central banks have run out of means of returning inflation to target. That is certainly not the case

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