Reported in the Wall Street Journal, Adam Posen talks about the UK's current situation.
Inflation in the UK is rising while it's falling elsewhere, and we're above target yet the Bank of England isn't about to start raising interest rates.
Yet inflation expectations are a big thing: Will people infer from the Bank's lack of action that in reality inflation won't be low any more? Apparently not, Posen says. He says that from surveys and yields on particular length financial assets (ones that you could put your money into if you were concerned about inflation eroding the value of your money), expectations are still "anchored".
But why is inflation rising in the UK and not elsewhere? It's keeping the MPC up at night. We covered in our lectures cost-push and demand-pull inflation. In the last 2 years the pound has lost 25% of its value against our trading partners. That could well explain why inflation is up: Cost-push inflation, as the cost of inputs rises because we import many of our inputs.
Maybe a student of econ101b should write to Adam and help him get some sleep tonight...
This blog accompanies the econ101ab Principles of Economics course given at the University of Birmingham. The lecturers for both parts of the course (101a, microeconomics and 101b, macroeconomics) will occasionally post here on matters related to lecture material. We hope to show the relevance of the concepts we are teaching at each stage of the course for helping understand how the world works...
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