BOE MPC’s Mann: Data Suggests Trade-Off In Terms Of Rising Inflation vs. Deteriorating Earnings

This is Catherine Mann, a member of the BOE MPC. . She says:

• earnings data suggest a growing trade-off in terms of rising and persistent inflation versus deteriorating real earnings
• UK exposure and sensitivity to global spillovers could exasperate offsetting inflationary activity
• incoming data in inflation

  Inflation
  

  Inflation is defined as a quantitative measure of the rate at which the average price level of goods and services in an economy or country increases over a period of time. It is the increase in the general price level where a given currency effectively buys less than in previous periods. In terms of assessing the strength of currencies, and by extension the exchange rate, inflation or its measures are extremely influential. Inflation stems from the general creation of money. This money is measured by the level of the total money supply of a specific currency, for example, the US dollar, which is constantly increasing. However, an increase in the money supply does not necessarily mean that there is inflation. What leads to inflation is a more rapid increase in the money supply relative to the wealth produced (measured by GDP). As such, this creates demand pressure on a supply that is not growing at the same rate. The consumer price index then rises, generating inflation. How does inflation affect Forex? The level of inflation has a direct impact on the exchange rate between two currencies at various levels. This includes purchasing power parity, which attempts to compare different purchasing powers of each country based on the general level of prices. In doing so, this makes it possible to determine the country with the most expensive cost of living. Consequently, the currency with the higher rate of inflation loses value and depreciates, while the currency with the lower rate of inflation appreciates in the foreign exchange market. Interest rates are also impacted. Inflation rates that are too high raise interest rates, which has the effect of depreciating the currency in the exchange rate. Conversely, inflation that is too low (or deflation) pushes interest rates down, which has the effect of appreciating the currency in the foreign exchange market.
  

  Inflation is defined as a quantitative measure of the rate at which the average price level of goods and services in an economy or country increases over a period of time. It is the increase in the general price level where a given currency effectively buys less than in previous periods. In terms of assessing the strength of currencies, and by extension the exchange rate, inflation or its measures are extremely influential. Inflation stems from the general creation of money. This money is measured by the level of the total money supply of a specific currency, for example, the US dollar, which is constantly increasing. However, an increase in the money supply does not necessarily mean that there is inflation. What leads to inflation is a more rapid increase in the money supply relative to the wealth produced (measured by GDP). As such, this creates demand pressure on a supply that is not growing at the same rate. The consumer price index then rises, generating inflation. How does inflation affect Forex? The level of inflation has a direct impact on the exchange rate between two currencies at various levels. This includes purchasing power parity, which attempts to compare different purchasing powers of each country based on the general level of prices. In doing so, this makes it possible to determine the country with the most expensive cost of living. Consequently, the currency with the higher rate of inflation loses value and depreciates, while the currency with the lower rate of inflation appreciates in the foreign exchange market. Interest rates are also impacted. Inflation rates that are too high raise interest rates, which has the effect of depreciating the currency in the exchange rate. Conversely, inflation that is too low (or deflation) pushes interest rates down, which has the effect of appreciating the currency in the foreign exchange market.
  Read this Term show growing domestic roots, persistence and drive

• offsetting factors significantly and increasingly likely to support consumer spending in the near term
• sound policy would reduce the risk of built-in domestic inflation being further boosted by imported inflation through a depreciating pound sterling
• domestic situation is characterized by very high inflation
• if the Fed tightens at the rate currently expected, and the ECB manages to raise soon, the scenarios outlined above suggest additional depreciation pressure on the British pound
• Given the likely double-digit inflation, it is particularly relevant to consider the short-term implications of global factors for inflation.
• a 50 basis point move reduces the risk of domestic inflation being boosted by a weaker sterling
• I open the door to a reversal of the policy rate in the medium term when the internal supports for demand fade and when the weakness in external sources of demand bites.
• For the UK, the data shows that the US tightening has been inflationary rather than disinflationary.
• it is important to react in a timely manner to a US monetary policy shock that causes the UK price level to skyrocket