UK inflation back near 2%, Bank of England Governor says

Date: Wednesday 25 Jan 2012

In a speech offered last night the Governor of the Bank of England, Mervyn King, asked attendees to look through the current fog of economic gloom towards the outcome which authorities are working towards, the rebalancing of the UK economy within a more balanced global landscape.

Nonetheless, he did admit that, “the path of recovery is likely to be arduous, long and uneven,” as, “rebalancing the world economy, and the UK economy within it, is not proving to be a smooth process. But it is necessary.”

In this same vein, he added that 2012 will not be an easy year given that the three factors which have shaped the economic environment over recent years continue to set the scene for 2012: tight credit conditions, higher household saving and the dark clouds hanging over the world economy.

Worth noting, the Governor dedicated a good part of his speech to the factors which led to a “ferocious” squeeze on purchasing power which in turn was responsible for much of the weakness in growth seen in 2011. In fact, and by his reckoning, “we have now experienced the longest period over which real wages have failed to rise since the 1920s.”

Of particular interest as well, perhaps, he also mentions the risk that credit constraints may hinder the reallocation of resources required to rebalance the economy. Furthermore, and over time, there is also a risk that a lack of finance may reduce productivity growth.

Lastly, and on a more positive note, he observed that, “after taking into account normal seasonal variation, the rate of price increases in the past few months has been close to 2% a year,” while at another point indicating the following, “with inflation falling back and wage growth subdued, there is scope for interest rates to remain low, and, if necessary, for further asset purchases, to prevent inflation falling below the 2% target.”

AB

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