In a document published by the MPC, the Treasury Committee attributed the UK’s stable inflation performance to effective inflation targeting and current institutional arrangements, combined with cheaper imports, increased competitive pressures associated with globalisation, and increases in the labour supply.
However, the MPC said that most of the benefits of globalisation had already occurred and that the adverse impact on commodity prices in the development of China and India was now being felt.
In addition, the effective labour force had been predicted by the MPC to not grow as rapidly as it has done for the past decade, all on which it believes could contribute to the macroeconomic context being less benign.
The report said: ‘In the face of uncertainties, the strength of the current monetary policy framework is the flexibility it gives the MPC to adapt its analysis in the light of events and new data, while still maintaining a clear focus on the inflationary target.’
Ray Boulger, senior technical manager for John Charcol, commented: “Over the last 10 years inflation has been contained by quite narrow binds, while I suspect they may be a bit wider over the next 10 years. Stable inflation has been partly due to government policy, but the Chancellor has been lucky with the global situation and some of his stealth tax reforms would have been more unhelpful if this was not the case.
“It is hard to say why inflation may be less stable – we have been lucky. It’s hard to predict two years ahead, let alone 10. The government can help but it cannot predict global events which can influence inflation.”
