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Bank of England downgrades unemployment threshold February 15 2014, 0 Comments

The Bank of England has updated its forward guidance policy (12 February 2014) in the light of the December unemployment figures, which showed a sharp drop to 7.1% - just short of 7% unemployment threshold set n August. Despite the unexpected fall in the unemployment figures, the Bank estimates that there is still sufficient slack in the economy to keep interest rates at 0.5%.

Further clarification of forward guidance November 15 2013, 0 Comments

MPC member Martin Weale provided further clarification of the Bank of England’s ‘forward guidance’ policy when he addressed A-Level students at Quintin Kynaston Community Academy in London. Martin explained that the unemployment threshold did not meant that interest rates would automatically be raised if unemployment fell to 7%, only that it will review the situation.

Quantitative easing January 23 2013, 0 Comments

Minutes of the MPC meeting held on January 9th and 10th were released today (Jan 23rd) and provided clear evidence that MPC members are shying away from further rounds of Quantitative Easing (QE).  As the Committee pointed out, the underlying state of the UK economy is harder to gauge that usual given the one-off nature of the Olympic Games and the Diamond Jubilee celebrations. The view was that further asset purchases were unnecessary and may have a very weak effect on stimulating nominal demand.

Inflation Latest October 11 2012, 0 Comments

October's official inflation figures for the UK, announced yesterday, took a turn for worst, and marked the end of period of falling inflation. CPI inflation now stands at 2.7%, up from 2.2% in September - which was the lowest rate since November 2009.

The ONS reported that upward pressure on average prices came from increased university fees which kicked in this month. Undergraduate tuition fees in England for UK and EU students have risen to a maximum of £9000 for this academic year, contributing to an eye-watering rise in education costs of 19%. Other significant increases have come from food and non-alcoholic beverages, and transport costs. Rising prices in these sectors were offset by downward pressure from housing and household services and recreation. The CPI index rose to 124.2,  based on 2005 prices (2005 = 100).

The impact of the rising tuition fees on the CPI would have been much greater were it not for the relatively low weighting education is given in the CPI index. The weights for clothing and footwear in 2012 were three times that of education (61 compared with 19, out of total weights of 1000). Indeed, weights for alcohol and cigarettes (at 42/1000) were twice those of education.

How the CPI and RPI are calculated has, of course, been the subjected of much scrutiny over the years, ever since the RPI was introduced in 1975 to get a fix on the rampant inflation associated with the mid-1970's oil shocks. Basing the weights on the 'typical' spending pattern of 'average' households has been the bedrock of inflation calculation ever since, and it is hard to justify any drastic alteration in methodology. The CPI itself was introduced in part to improve the ability of the index to update itself by taking into account changes in household spending based on the inflation that it was measuring. What the index does not do, and was not designed to do, is to give an indication of the likely negative impact of particular inflation on the future of the economy, and its economic performance. This job is left to the Bank of England, the Treasury, academics and professional analysts. Perhaps it is time for another general index with weights that reflect the significance of inflation in particular sectors to future economic well-being. Such an index would, surely, weight education at a much higher level, and give a better indication of the impact of higher tuition fees on the UK economy's supply-side performance, growth, jobs and the balance of payments.

More on inflation

Source: ONS