Eastern Eye (UK)
Inflation would soon fall sustainably, says Dhingra
BRITISH INDIAN POLICYMAKER CALLS FOR UK INTEREST RATES TO BE KEPT ON HOLD
MANAGING the impact of inflation on families and firms should be an immediate policy priority, the Bank of England’s Monetary Policy Committee (MPC) member, Dr Swati Dhingra, has said.
However, she warned it will not “be easy” to attempt cooling inflationary pressures without deepening any resulting economic downturn.
Dhingra’s remarks came at a Resolution Foundation event last Wednesday (8) on the topic ‘A cost-of-living crisis: Inflation during an unprecedented terms-of-trade shock’.
The British Indian policymaker called for UK interest rates to be kept on hold, as she cautioned further tightening was “a bigger risk” than holding interest rates at four per cent.
Dhingra is an associate professor of economics at the London School of Economics and also sits on the Bank of England’s MPC. Last month, she voted to leave interest rates unchanged.
Dhingra said at last week’s event that the vast majority of inflation had been caused by higher energy and import prices.
She pointed to weak consumption as evidence that inflation would soon fall sustainably.
“Recent research indicates the persistent scarring effects of deep contractions – associated with monetary policy tightening and energy market disruptions – indicate the harmful consequences of overtightening.
“Such an approach would increase the downside risks of missing the inflation target in the medium term,” Dhingra said. “A prudent strategy would hold policy steady, amid growing signs external price pressures are easing, and be prepared to respond to developments in price evolution. This would avoid overtightening and return the economy sustainably to our two per cent inflation target in the medium-term,” said Dhingra. According to her, inflation is expected to fall sharply over the year in 2023, “if we do not see further cost increases of magnitudes similar to those that resulted from the war in Ukraine”.
“For energy costs, this is hard to predict, but the recent experience over the winter gives some hope for the coming months and with some uncertainty, possibly over the next winter,” she said.
In her opinion, private sector wage growth is high and a
flattening off in wage growth and, in some cases, dampening, will occur in the near term.
Dhingra said with the labour market starting to turn and the cost-of-living crisis taking hold on disposable incomes, many firms are finding it difficult to pass through fully existing cost rises to consumer prices.
She said a weak demand outlook in the future is expected to reinforce this.
“Tighter credit conditions and the cost-of-living crisis have already led to weak GDP growth and a recent slowdown in the housing market.
“The value of additional accumulated savings during the pandemic has also been largely depleted.
“Consumption remains much below pre-pandemic levels and it is hard to see where substantial renewed demand pressures could come from, particularly as the effects of monetary tightening start to also play a bigger role in dampening economic activity,” she pointed out.
The Bank of England has already raised interest rates by 390 basis points since December 2021.
Dhingra, who has been part of the Economy 2030 Inquiry, a collaboration between the Resolution Foundation and the Centre for Economic Performance at LSE, said it was established that monetary policy affects the real economy with long, variable and somewhat unpredictable lags. “Monetary policy takes well over a year to affect inflation. Rate hikes take time to get passed through from financial markets to households and firms who determine consumer prices. Going forward, there is reason to expect therefore that demand will be subdued and not inflame inflation further,” Dhingra said.
“Consumption remains weak and many of the tightening effects of monetary policy are yet to fully take hold.”
Dhingra said the steep increase since autumn 2021 in the imported price of energy weighs on real incomes in this country, leading to an exceptional cost-of-living crisis.
“Based on national statistics and a long tradition of work on inputoutput linkages along the supply chain, we decompose CPI inflation into the extent to which it is driven directly by imports shares in final consumption and indirectly by cost pressures from energy, other imported inputs, wages and residual profit margins that make up the price of consumer items,” she said.