BOE Posen: Stagflation Unlikely; Trend Growth Little Changed

–BOE Posen: Stagflation Unlikely; Trend Growth Little Changed
–BOE Posen: BIS Call for Higher Bank Rate is “Nonsense”
–BOE Posen: Trend Productivity Largely Undiminished
–BOE Posen: Workers Have Limited Wage Bargaining Power
–BOE Posen: Little Evidence of Rising Inflation Expectations
–BOE Posen: Oil Price Trends Not Obviously Accelerating Upwards
–BOE Posen: Energy Price Trend Doesn’t Justify Policy Response

LONDON (MNI) – Bank of England Monetary Policy Committee member
Adam Posen attacks the idea the UK is vulnerable to stagflation, saying
the key conditions for it are not in place and he dismisses the Bank for
International Settlements call for central banks to set higher interest
rates as “nonsense”.

Posen paints a picture of a UK economy which has little or no
credit growth, little wage growth above productivity and few signs of
rising inflation expectations. Posen, who has called for an extension of
quantitative easing, says central banks have a tendency to err in favour
of “pre-emptive” policy tightening, but he argues it is a mistake.

A slide and bullet point presentation from Posen, issued in advance
of the speech at University of Aberdeen Business School, sets out his
key arguments.

He says the current situation is parallel to the 1930s, without the
textbook mistakes by policymakers, and far from what was experienced
during the last bout of stagflation in the 1970s.

Posen argues that the case for “pre-emptive monetary policy”, the
case for heading off a wage-price spiral, “stems completely from the
1970s experience.”

He says four conditions need to be in place to generate a 1970s
style wage price spiral. These are: unanchored inflation expectations;
inflation expectations being transmitted into “real wage resistance”;
significant energy price shocks and an “unrecognized decline in trend
productivity growth.”

Posen says only one of the four conditions – the energy price shock
– is possibly at work at present.

Posen notes the BIS had recently cited the UK’s above target
inflation and has called for central banks to raise rates and he
describes the BIS’ views as “nonsense”.

“Some central banks, particularly in EMs (exchange mechanisms)
pegged to the US dollar, should raise rates as their conditions demand,”
Posen says.

“In the UK and west more broadly, there is little or no credit
growth, little wage growth beyond productivity, little evidence of
rising inflation expectations and oil prices are not yet a one way bet,”
Posen says.

The MPC member looks at the conditions that were prevalent in the
UK in the 1970s and compares them to the current ones.

In the 70s the UK had seen 30 years of rising union power but
“today we are seeing the result of 30 years of declining union power.”

Nowadays workers have limited wage bargaining power, wages have
declined as unemployment has risen and there has been no run up this
time in UK unit labor costs.

On the vexed question of whether oil, and related energy prices,
are on a rising trend that is, or will, deliver a major supply side
shock, Posen is more nuanced.

He says “there is a plausible story to be told regarding both
supply and demand that we are all going to cope with ongoing price rises
in energy.”

But he notes the MPC relies on future market prices for oil and
these “are only flat to slightly upward.”

Also recent oil price reversals “seem to be pretty big and
sustained.”

He says the MPC is watching energy prices carefully, and does not
rule out a policy response but says it is not justified at present.

“If the trend is big enough and reversals short enough, we will
respond to keep inflation in line with the target … but a majority of
the MPC (and I agree) says (we are) not yet there,” Posen says.

The MPC member also looked at the case for a slump in UK
productivity, which the latest data suggest has happened.

He is unconvinced by this view, however, saying “we should continue
to treat UK trend growth as largely unchanged,” arguing there are good
reasons to doubt the productivity data.

–London newsroom: 4420 7862 7491; email: drobinson@marketnews.com

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