Quarterly Bulletin
Inflation and Prices Articles
| 2008 Q2 | Public attitudes to inflation and interest rates  (768k) By James Benford of the Bank's Monetary Assessment and Strategy Division and Ronnie Driver of the Bank's Inflation Report and Bulletin Division. A key upside risk to the medium-term outlook for inflation stems from the possibility that a further period of above-target inflation could lead to persistently elevated inflation expectations. According to the Bank/GfK NOP survey, households' expectations for inflation over the next year have risen markedly. This article focuses on the factors which may have driven the increase, drawing on the results of some additional questions included in the February 2008 survey. It concludes that while the latest increases in households' inflation expectations could be consistent with recent macroeconomic data, increases in households' perceptions of current inflation may also have played some role. The article also summarises the public's attitudes to interest rates and the conduct of monetary policy. |
| 2007 Q4 | The macroeconomic impact of higher energy prices on the UK economy (670k) (By Richard Barwell of the Bank's Conjunctural Analysis and Projections Division and Ryland Thomas and Kenny Turnbull of the Bank's Structural Economic Analysis Division.) This article explores the macroeconomic impact of the rise in energy prices since 2004. The article discusses the various channels through which rising energy prices are likely to influence the degree of inflationary pressure in the UK economy. Rising energy costs put upward pressure on the prices of energy-intensive goods and services, and can affect both aggregate demand and potential supply. The adjustment of prices and quantities in the labour market are particularly important in this regard. Ultimately though the impact on inflation will depend on monetary policy and the behaviour of inflation expectations. Some past episodes in which energy prices increased sharply preceded a marked deterioration in the macroeconomic environment. The evidence so far suggests a more muted impact on the economy than in these previous cases. |
| 2007 Q3 | Interpreting movements in broad money (638k) (By Stuart Berry, Richard Harrison, Ryland Thomas and Iain de Weymarn of the Bank's Monetary Analysis Division.) Understanding the role of money in the economy has always been an important issue for policymakers. And the pickup in broad money growth and decline in credit spreads over the past three years together with more recent financial market turbulence has made it a particularly pertinent issue. Monetary data can potentially provide important corroborative or incremental information about the outlook for inflation. But understanding the possible implications of money for the economic outlook requires a detailed assessment of the causes of money growth. Such an assessment must recognise the interactions between money and credit creation and the information contained in both price and quantity data. This article provides an overview of the potential channels through which money growth may affect inflation and the Bank's current empirical approach to analysing developments in monetary aggregates. |
| 2007 Q2 | Public attitudes to inflation and interest rates (773k) (By Ronnie Driver of the Bank's Monetary Assessment and Strategy Division and Richard Windram of the Bank's Inflation Report and Bulletin Division). Since 2001, the Bank of England has published an annual article discussing the results from the survey of public attitudes to inflation carried out by GfK NOP on behalf of the Bank. This article analyses the results of surveys up to February 2007. Given the relevance of inflation expectations to the current inflation outlook, this year's article focuses on the pickup in the general public's inflation expectations between 2005 and 2006, and the factors that may have contributed to that rise. It also considers the interactions with the public's attitudes to interest rates. Responses to other questions in the survey are discussed in the annex. |
| Summer 2006 | Public attitudes to inflation (455k) (By Colin Ellis of the Bank's Inflation Report and Bulletin Division). Over the past six and a half years, GfK NOP has carried out surveys of public attitudes to inflation on behalf of the Bank of England. As part of an annual series, this article analyses the results of the surveys from May 2005 to February 2006. Public perceptions of past and future inflation picked up recently, while most people thought interest rates had risen over the past year. Public understanding about the monetary policy framework remained limited, but people were generally satisfied with the way the Bank has been setting interest rates. |
| Autumn 2005 | Long-run evidence on money growth and inflation |
| Summer 2005 | Public attitudes to inflation |
| Summer 2004 | The new Bank
of England Quarterly Model
(72k) The Bank of England has developed a new macroeconomic model to help prepare the Monetary Policy Committee's quarterly economic projections. The new model does not represent a change in the Committee's view of how the economy works or of the role of monetary policy. Rather, recent advances in economic understanding and computational power have been used to develop a macroeconomic model with a more clearly specified and coherent economic structure than in previous models used by the Committee. This article provides an overview of the new model and includes some simple simulations to illustrate its properties. Public attitudes to inflation
(106k)(by Norbert Janssen of the Bank's Inflation Report and Bulletin Division). Since November 1999 the market research agency NOP has carried out quarterly and annual surveys of public attitudes to inflation, on behalf of the Bank of England. As part of an annual series, this article analyses the results of the surveys from May 2003 to February 2004. Public opinion on most issues has changed little over the past year. Around one in five people thought retail price inflation had been between 2% and 3% over the past year and a similar proportion expected price increases in that range. Both in November and February, a large majority of respondents expected interest rates to rise over the next year, though nearly 40% thought the economy would fare best if rates stayed where they were. Just over half the sample population remained satisfied with the way the Bank is setting interest rates. |
| Spring 2004 | Durable spending,
relative prices and consumption
(122k) (by John Power of the Bank's Structural Economic Analysis Division). In real terms, the growth of durable spending has substantially outpaced that of spending on other goods and services since the mid-1990s. But that gap largely reflects the effects of falling relative prices: nominal spending on durables and on non-durables has grown at similar rates during that period. This article uses a simple framework to assess the behaviour of the real and nominal ratio of durables to non-durable spending in the long run. It also considers the current position of the ratios in more detail and provides some assessment of how we might expect them to have evolved given prevailing cyclical factors. |
| Autumn 2003 | Public expectations
of UK inflation
(92k) (by Clare Lombardelli and Jumana Saleheen of the Bank's Monetary Assessment and Strategy Division). Every quarter, NOP carries out a survey of the inflation expectations of the general public. This article illustrates how expectations vary according to individuals' different circumstances, and tries to explain how these differences might occur. Inflation targeting and the fiscal policy regime: the experience in Brazil
(104k)(by Francesco Giavazzi, Houblon-Norman Fellow and Professor of Economics at Bocconi University, Milan and Visiting Professor of Economics at the Massachusetts Institute of Technology). This article reviews the recent experience of Brazil showing that credit risk is at the centre of the mechanism through which a central bank might lose control of inflation. Brazil during 2002 came close to a situation where fiscal policy hindered the effectiveness of monetary policy. But in early 2003 a change in investors' perception of the long-run fiscal stance brought the economy back to normal conditions, reducing credit risk, stabilising the exchange rate and, through these two variables, inflation expectations, inflation and the dynamics of the public debt. Brazil's experience could thus offer useful lessons for other emerging market economies, which consider adopting inflation targeting as their monetary policy rule. The optimal rate of inflation: an academic perspective
(80k)(by Peter Sinclair, Houblon-Norman Fellow and Professor of Economics at the University of Birmingham). In an economy free of all imperfections, inflation should be slightly negative. Prices should keep dropping, at the real rate of interest. Any higher rate of sustained inflation (or lower deflation) would reduce the benefits from holding real money. Central banks typically aim for modest positive inflation, however. This article explores five types of imperfection: inertia in nominal prices, the need for distorting taxes, market power for retail banks, the value of the option to cut nominal interest rates in bad times, and menu costs. It concludes that the combined effect of these imperfections is in practice likely to justify a small positive rate of inflation. |
| Summer 2003 | Public attitudes
to inflation
(69k) The market research agency NOP has been carrying out quarterly and annual surveys of public attitudes to inflation on behalf of the Bank since November 1999. As part of a regular series, this article describes the results of the full annual survey that took place in February 2003. It shows that public opinion remains fairly stable on most issues, though expectations of future interest rate movements do of course fluctuate. Those who think rates should stay where they are remain the largest group, but among the rest, the public was evenly divided over whether it would be better for Britain's economy for rates to rise or fall over the next few months. The proportion satisfied with the way the Bank is doing its job of setting interest rates has fallen since last year. But the decline in the approval ratings may have reflected the reduction in awareness of the Bank's policies, when rates were unchanged for a long period. |
| Spring 2003 | Monetary policy and
the zero bound to nominal interest rates
(93k) (by Tony Yates of the Bank's Monetary Assessment and Strategy Division). Some commentators have recently discussed the possibility that certain countries may experience a period of general price deflation. In such a situation, nominal interest rates may reach their lower bound of zero. This article concludes that the evidence available suggests that such a situation is highly unlikely to occur in the United Kingdom. It reviews what the academic literature has to say about the scope for alternatives to cutting interest rates in the improbable event that nominal interest rates do reach zero. |
| Winter 2002 | What do measures
of core inflation really tell us?
(102k) (by Alan Mankikar and Jo Paisley of the Bank's Conjunctural Assessment and Projections Division). Despite the widespread use of the term 'core inflation', there is neither a widely accepted theoretical definition, nor an agreed method of measuring it. The wide range of conceptual bases is potentially confusing, particularly when the measures display different trends. This article offers an overview of some of the issues. It examines how core inflation has been defined, sets out to what extent the concept might be useful for policy-makers and assesses the wide range of available measures in the United Kingdom. Estimating the impact of changes in employers' National Insurance Contributions on wages, prices and employment
(70k)(by Brian Bell, Jerry Jones and Jonathan Thomas of the Bank's Structural Economic Analysis Division). This article explains how changes in payroll taxes might affect real wages and employment. It then estimates the responses of relative wages, prices and employment to the changes in employers' National Insurance Contributions (NICs) that occurred in 1999. The empirical evidence is based on industry-level data and exploits valuable variation in the extent to which these changes in the payroll tax affected different industries. |
| Autumn 2002 | Money and credit
in an inflation-targeting regime
(85k) (by Andrew Hauser and Andrew Brigden of the Bank's Monetary Assessment and Strategy Division). This article is one of a series on the UK monetary policy process. It discusses how the assessment of money and credit data fits into the Bank's quarterly forecast round. Monetary statistics are available more rapidly than most other economic data and provide early information on the near-term economic outlook. The analysis on money and credit might be used to adjust some output of the Bank's macroeconometric model. It could also help the MPC to assess the risks around its central projections, reflected in the inflation and GDP fan charts. |
| Summer 2002 | Public attitudes
to inflation
(61k) As part of a regular series, the market research agency NOP has been carrying out quarterly and annual surveys of public attitudes to inflation on behalf of the Bank since November 1999. This article describes the results of the full annual survey which took place in February 2002. It shows that public opinion remains fairly stable on most issues, though expectations of future interest rate movements do of course fluctuate. Those who think rates should stay where they are remain the largest group, but among the rest, the public was evenly divided over whether it would be better for Britain's economy for rates to rise or fall over the next few months. The proportion satisfied with the way the Bank is doing its job of setting interest rates is very little changed from November. No money, no inflation—the role of money in the economy
(177k)In this article, Mervyn King, Deputy Governor, examines the apparent contradiction that the acceptance of the idea inflation is a monetary phenomenon has been accompanied by the lack of references to money in the conduct of monetary policy during its most successful period. The disappearance of money from the models used by economists is, however, more apparent than real, with official interest rates playing the leading role as the instrument of policy, with money in the wings off-stage. Nevertheless, there are real dangers in relegating money to this behind-the-scenes role. Asset prices and inflation
(108k)(by Roger Clews of the Bank's Monetary Instruments and Markets Division). This article is one in a series on the UK monetary policy process. It discusses some of the interconnections between inflation, monetary policy and asset prices. The Monetary Policy Committee is extensively briefed on asset market developments, along with other developments in the economy, before it makes its policy decisions. |
| Autumn 2001 | Public attitudes
about inflation: a comparative analysis |
| Summer 2001 | The Bank of England
inflation attitudes survey
(57k) As part of a new regular series, the market research agency NOP undertook a survey of public attitudes to inflation for the Bank of England in February. The results show that, given a choice between higher interest rates or higher inflation, four times as many people would prefer interest rates to go up, rather than prices. Other results suggest that most people are aware that the Bank, rather than the Government, now sets interest rates. 55% are satisfied with the way the Bank is doing its job; just 10% are dissatisfied. Most people are aware that inflation is low, but only one in three knows that it is currently between 1% and 3%. However, very few expect inflation to rise sharply in the year ahead. |
| August 1999 | What makes prices
sticky? Some survey evidence There are several findings from the survey. The more competitive are firms' product markets, the greater is the propensity to change prices in response to a demand shock; but market structure does not affect the responsiveness of prices to changes in costs. Second, there is some evidence that real rigidity (measured by the flatness of the supply curve) reduces the responsiveness of nominal prices to demand shocks. Third, there is evidence that the lower are search costs in product markets (at least measured by our proxy), the greater is the responsiveness of prices to changes in costs; although search costs seem to have no effect on the responsiveness of prices to changes in demand. Fourth, the export intensity of firms appears to reduce the responsiveness of prices to changes in costs; this supports pricing-to-market models based on rigidities in demand, as opposed to those based on the sunk costs of supply. Fifth, there are significant asymmetries in the responsiveness of prices to the direction of cost and demand shocks. Demand increases appear less likely to prompt price changes than demand decreases; but cost increases are more likely to prompt price changes than cost decreases. The results in the article confirm some theories of price stickiness, but reject others. What weight should be placed on these results? The answer depends on how valid the research strategy presented is as a device for testing economic theories. One view that has much currency in modern economics is that economic theories should not be constructed from ad hoc relationships, but be judged by how well founded they are in microeconomics; so analogously it might be argued that, where possible, theories should be well founded in microeconometrics. So the evidence in the article is a useful complement to macroeconometric studies. Moreover, much of the empirical evidence on price stickiness, based on aggregate or individual firm data, faces the difficulty of identifying natural experiments that correspond to the theories being tested. The questionnaire, which asks firms what they would do in particular situations, sets up those natural experiments explicitly. Clearly, to place any weight on these findings assumes that firms would actually do what they said they would do, if confronted with the situations hypothesised in the questionnaire. |
| February 1999 | The impact of inflation
news on financial markets Monetary policy rules
and inflation forecasts |
| February 1998 | The Inflation Report projections: understanding the
fan chart (354k) (by Erik Britton, Paul Fisher and John Whitley of the Bank's Conjunctural Assessment and Projections Division). Since February 1996, the Bank's inflation forecast has been published in the form of a probability distribution - presented in what is now known as 'the fan chart'. This article discusses the motivation for the change, describes how the chart is produced and explains how it reflects the forecast process. |
| August 1997 |
Quantifying some benefits of price stability Inflation and inflation uncertainty |
| November 1996 | How should central banks reduce inflation? - conceptual issues (131k) In a paper prepared for the Symposium on 'Achieving Price Stability' sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Mervyn King, Executive Director and Chief Economist of the Bank of England discusses how quickly a central bank should reduce inflation to its desired level following an inflationary episode. He argues that a central bank is unlikely to wish to move immediately to price stability, since there are costs to disinflation and these costs increase more than proportionally with the rate of disinflation. These costs, which arise because economic agents have to learn about the central bank's commitment to price stability, also mean that a central bank may wish to react to shocks to output as well as to inflation. But Mervyn King stresses that any such response should be cautious in the period in which the private sector is still learning about the central bank's commitment to price stability. |
| May 1996 | How do UK companies set prices? (69k) (by Simon Hall, Mark Walsh and Tony Yates of the Bank's Structural Economic Analysis Division). In the autumn of 1995, the Bank conducted a survey of price-setting behaviour in 654 UK companies that maintain regular contact with the Bank's Agents. The survey was inspired by the work of Alan Blinder in the United States. The survey has made available much new information. For example, companies do not regard the direct costs of changing prices as being particularly important, although prices are typically changed infrequently, on average only twice a year. Preserving customer relationships is very important for firms in making decisions about prices. And there are many differences among firms about which factors influence price changes. These results throw light on how monetary policy-which is focused on the control of inflation-affects the economy. The article describes the survey results and how they compare with other information about UK price setting. |
| August 1995 |
Inflation targets The Bank's new UK commodity price index |
| May 1995 |
Bond prices and market expectations of inflation Inflation and economic growth |
| February 1995 | The costs of inflation (59k) (by Clive Briault of the Bank's Monetary Assessment and Strategy Division) surveys the academic literature: economic theory suggests that inflation imposes costs through a variety of channels; consistent with this, most empirical studies have found a significant negative correlation between inflation and growth. At the broadest level, the available evidence supports the view that well-run economies with strong and efficient productive structures tend to exhibit both low inflation and high growth. |
| August 1994 | Investment appraisal criteria and the impact of low
inflation Estimating market interest rate and inflation expectations
from the prices of UK government bonds |
| May 1994 | Inflation over 300 years (351k) (by Helen MacFarlane and Paul Mortimer-Lee of Economics Division) looks back over the period since the Bank's foundation, and offers some reflections on the history of inflation - and on how thinking about inflation has developed - since 1694. |
