Economic Review – August 2017

When, in early August, the Bank of England (BoE) Monetary Policy Committee (MPC) voted 6-2 to leave base rate at 0.25%, a long-running interest rate saga continued.

The latest quarterly Inflation Report from the Bank of England published in August provides an in-depth analysis of homegrown and imported factors known to influence the rate of inflation. A major conclusion of all the number crunching and judgment calls is that year-on-year inflation – as measured by the CPI – is likely to peak this autumn at about 3%. The official target is 2%.

On the last day of August, the third round of Brexit negotiations in Brussels ended in “no decisive progress” according to Europe’s chief Brexit negotiator Michel Barnier. Upbeat Chinese and US economic news provided some light relief, while geopolitical tensions over North Korea persisted.

The headline UK unemployment rate, which peaked at 8.5% in 2011, has been defying traditional economic wisdom since wrong-footing the Governor of the Bank of England. When Mark Carney issued guidance in August 2013, he said no interest rate rise would be considered until unemployment fell to 7%.

Ever since the inflation that followed Prime Minister Harold Wilson’s claim that the 1967 devaluation would not affect the pound in their pocket, the British public has perceived a weakened currency as a bad thing. Agreed, it makes foreign holidays and many imports costlier, but it also has an upside.