Memorandum submitted by Bridget Rosewell,
Economic growth seems robust and the concerns
voiced at the beginning of this year that 2006 would experience
weak consumer growth appear to have been misplaced. Growth of
output in London increased to a rapid 3.4% in the second quarter
of 2006, well above the rate for the UK as a whole. London is
particularly responsive to changes in the fortunes of the financial
services sector and the expected size of this Christmas' City
bonuses suggests that the sector is performing well. Financial
services employment in London is likely to have risen in 2006
after three consecutive years of employment loss.
After five years in which the UK repo rate has
been above that of the US, US rates moved above UK ones at the
beginning of the year. The recent moves bring UK rates closer
in line with those in the US and also widen the gap with Euro
rates again, which had also sharply narrowed.
It would be useful to discuss the view taken
in the MPC of appropriate margins with other international base
rates. The Inflation Report does not discuss this.
Falling energy prices over the last quarter
should feed through to utility bills if the falls are sustained.
However, at the very least there is a considerable lag effect.
Recent work undertaken by "Which?" Research suggests
that gas bills are now typically 60% higher than a year ago and
electricity bills 40% higher. This takes the average annual household
expenditure on gas and electricity to £1,030, up more than
£350 on 2005. As well as having an effect on overall inflation,
such an increase will have significant distributional impacts.
Many utility companies are still announcing increases due to take
effect in the New Year.
It is widely accepted that the Retail Price
Index (RPI) measure is more commonly used in wage negotiations
and this measure is now at its highest level for more than eight
years (3.7%). This might mean that wage settlements in the 2007
pay round could be driven significantly higher. However, the trend
in the Average Earnings Index is currently downwards. Even including
bonuses, the growth on one year previously dipped back beneath
4% in September (the latest data available). It is worth bearing
in mind that bonuses tend to be concentrated in specific, higher-level
occupations within the financial sector and therefore are likely
to have their greatest impact in London.
The Bank discusses these effects and the role
of inflation expectations in pages 29-32. What is not clear
from this is what evidence they would consider would definitely
show that inflation expectations had risen unduly or were now
more embedded and likely to drive inflation further up.
The Governor has said that it has become increasingly
difficult to judge the state of spare capacity in the economy.
Their own surveys suggest that capacity utilisation is well above
its historic norm, while sluggish wage pressure suggests room
for manoeuvre. It may also be that the concept of spare capacity
has become much more slippery. With more and more activity in
the service sector it is the flexibility of the workforce which
drives the ability to expand, as well as the ability to increase
hours or recruit. Availability of fixed rather than human capital
is much less relevant. Yet we have almost no measures of human
capital in its application to output. This is issue is further
complication by ignorance about the levels of immigration. Some
estimates suggest that this may be running at twice the official
In my view, judging the scope of the economy
to grow has always been an uncertain matterperhaps it has
become less certain.
This may well lie behind the apparent widening
of the uncertainty band in the GDP projection. It would be worth
exploring this further with the Bank.