Bank of England Struggles With Slow Growth, Rising Inflation

The Bank of England and Governor Mervyn King face a desperate dilemma – allow the economy to continue its downward path, or attempt to boost growth through further quantitative easing. The catch of course is that with the promise of more “easy” money, comes a greater risk of pushing inflation – which is already a top-level concern – even higher.

For the month of September, inflation as measured by the Consumer Price index (CPI)surpassed all earlier projections jumping to a three-year high of 5.2 percent. Sharp increases in gas and electricity were mostly responsible for the hike but the cost of most household goods also rose as noted with a 5.6 percent hike in the Retail Price Index (RPI).

The Bank of England is tasked with implementing policy to maintain inflation as near as possible to 2 percent annual growth. If inflation deviates from this target by more than 1 percent in either direction, Governor King must send a letter to the Chancellor of the Exchequer to explain why the target was missed. The Governor has written many of these letters of late and will be writing yet another following September’s results.

For Britain’s beleaguered consumers, it must feel as though the walls are closing in. In addition to surging inflation, unemployment is at a 17-year high of 8.1 percent. It is hardly surprising then that consumer spending is down 0.9 percent year-over-year and this is particularly distressing as consumer spending accounts for two-thirds of Britain’s economic activity. Until consumer spending returns to more typical levels, recovery in the larger economy is out of the question.

In fact, officials are already preparing the public for another expected uptick in inflation in October as energy rates are scheduled to increase yet again. After this next round of price hikes, however, energy costs are expected to hold steady until later in the new year. For a population suffering through more than two years of elevated inflation, any promise that the rate of increase in the cost of living must be seen as a form of relief. A pause in inflation may also provide the Bank of England with a window of opportunity to engage in further quantitative easing.

Minutes from the September meeting of the Monetary Policy Committee indicate that the MPC members are lining up in favor of adding another £75 billion ($118.4 billion) to the £200 billion ($315.7) already committed to the easing program. This has increased speculation that the Bank will inject more money into the economy by expanding its program of purchasing gilts directly from financial institutions thereby making more money available for lending.

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