Ben surveys his time on the Monetary Policy Committee (MPC). He explains how the UK economy has been subject to several large, global shocks that have affected supply and costs more than demand. In that environment it is all the more important that monetary policy be conducted by an independent authority in pursuit of a fixed inflation objective.
Speech
Introduction and summary
Good morning! Thank you for asking me here today. After thirteen years as a member of the MPC this is my thirty-eighth and last speech and I wanted to offer a few reflections from that experience. I will also say something about the current outlook for inflation.
It’s certainly been an eventful time. I joined the Committee in 2011, when the economy was still feeling the effects of the global financial crisis (GFC) three years earlier. That was then followed by the Euro area debt crisis, which perpetuated the credit squeeze in this country. After a period of relative calm we then went through the EU referendum and the negotiations that ensued, followed at the start of the current decade by the enormous effects of the pandemic and Russia’s war in Ukraine.
Mervyn King once described the years preceding the GFC as the “NICE” decade (standing for “Non-Inflationary and Consistently Expansionary”). I’m not sure how one would characterise the period since (“Not-AS-Tranquil Years”?). But, if his description was designed as a warning that we couldn’t expect such stability to last indefinitely, he’s certainly been proved right.
Rather than going through these events individually I want to have a go at drawing some general conclusions from them.
From an economic perspective, two things strike one straightaway.
First, none of them involves simple shocks to aggregate demand. Arguably, macroeconomics – certainly the Keynesian macroeconomics taught to students – was born of an era (the Great Depression) characterised by a chronic shortage of spending. That may be why students are taught quite a bit about the determination of demand but less, at least to begin with, about the behaviour of supply and costs.
But while these events had at least some direct impact on demand – there’s no doubt, for example, that business investment in the UK suffered from tighter financial conditions during the GFC and the Euro area debt crisis and then again from the uncertainty about the UK’s trading relationships after the EU referendum – these were outweighed, as far as inflation is concerned, by their impact on costs and supply. The depreciations in sterling’s exchange rate in 2009 and 2016 led to periods of above-target inflation, notwithstanding any dampening effect on confidence and spending. The pandemic – to take a more extreme example – raised the cost of globally traded goods by so much that, even after GDP fell by more than a fifth in 2020, inflation rose significantly the following year, in the UK and across the developed world. So the notion that economic fluctuations are dominated by disturbances to aggregate demand, against a backdrop of an unchanging supply schedule, simply isn’t – or at least hasn’t been – true. In contrast to the earlier period, the correlation between output growth and changes in inflation has if anything been negative since the early 1990s (Chart 1). This doesn’t necessarily mean that supply-type shocks have become more common, as I’ll explain in a bit. But that certainly seems to have been the case in the past decade or so.
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