Philip Bunn and Jeremy Rowe
Rising inflation is eroding the spending power of UK households’ incomes. How will they react to that? The answer will make a big difference to the economic outlook. Will they dip into savings and carry on buying the same amount of goods and services, or will they just spend the same and be able to buy less with it? New survey evidence suggests that households intend to do a bit of both with nominal spending increasing by around half of the rise in prices but real consumption also falling. But not all households say they will respond in the same way: households with debts and limited savings to fall back on are less likely to be able to increase spending.
In a previous post I showed that bond and equity returns are negatively correlated, having been positively correlated for most of the 18th-20th centuries. The time series was long (three centuries) and the chart was just for the UK, prompting two very reasonable questions: 1) does your story hold for countries other than the UK? and 2) what’s happened to this correlation recently?
Samuel Cole, Jack Sherer-Clarke, Oliver Wallbridge, Annabel Manley.
Each year, the Bank of England organises the Target 2.0 competition for A-level economics students. In this guest post, the winning team at March’s national final from Pate’s Grammar School explain what they would do if they were the MPC…
We decided as a team to hold the Bank Rate at 0.5% and to maintain asset purchases at £375bn. In our view it is not yet time to tighten monetary policy. Though we believe the output gap is small, the economy is yet to reach escape velocity and the Wicksellian natural rate of interest is likely to remain depressed. We are more optimistic on potential supply than other economists and think oil prices will stay low. As such, we predicted that inflation will only reach 1.7% in 2018Q1 compared to the MPC’s median forecast in February of around 2.1% (which has since fallen to 1.9%).