A sticky wicket for the Bank

Cricket ball and stumps
Image caption The Bank of England faces a difficult playing field

Just a few months ago, the betting was that the Bank of England's policy makers would vote for at least one more round of quantitative easing this year to support the economy - if not several.

That is still quite possible: today's decision not to inject any more new money into the economy merely puts the policy on hold.

But a majority did not see the case for more easing, right now - despite a lot of recent news which you might have expected to prod them in that direction.

Since the committee last met, official figures have shown the economy to be formally in recession; concerns about the eurozone have returned with a vengeance; credit and lending conditions have tightened again; the housing market has continued to soften; the latest PMI survey of manufacturers have shown a worrying fall in export orders; and, making things for exporters that much harder, the pound has strengthened.

It's now about 3% higher, on a trade weighted basis, than it was at the time of the Bank's February Inflation Report.

Just so we're clear: none of these things suggest that growth this year will be stronger than the MPC previously thought. They suggest the opposite. Yet policy is on hold.

Why? Because inflation, as usual, has not done what the Bank expected either. And the difference between forecast and reality cannot be entirely explained by rising energy prices.

In the language of economists, Britain is suffering from "sticky prices".

Tell us something we don't know, I hear you cry.

You do not need reminding that the MPC has been grappling with this unfortunate combination for rather a long time: again and again, growth has been weaker than expected, and inflation has been higher.

As the folks at Fathom Consultancy pointed out this week in an interesting new report, this is not only unfortunate, it is also unique among Britain's major trading partners.

The first chart shows how Britain's growth since the start of 2008 has lagged behind. The next shows what has happened to the price level.

Britain's national output is now more than 4% smaller than it was four years ago - but our price level has risen 15% in that time. That's a far greater rise than any other G7 economy - for much less growth.

Image copyright Thomson Reuters Datastream/Fathom

Why has inflation been so stubborn? There are a number of possible answers: one is simply that we are importing inflationary pressures from the rest of the world (including from countries like China), after years when the rest of the world was helping to keep our inflation down. This may carry on for a while and there's not a lot we can do about it.

Another is that companies are finally trying to rebuild their margins by marking up prices, after years of being squeezed. Some on the MPC are sympathetic to this argument.

The final explanation, more worrying in the long-term for all of us (and much debated on this page in the past), is that we simply do not have as much spare capacity as we thought we did, meaning that there is less room for the economy to expand without prices and wages going up as well.

Official government forecasts - and many private ones - already incorporate a rather gloomy assessment of Britain's spare capacity.

In fact, they assume that the 2008 crisis has done more permanent damage to the UK economy than either the Great Depression or World War II.

It is possible that even this estimate is too optimistic about Britain's potential growth. It is also possible that it is too gloomy: what we are witnessing is, simply, a demand-deficient economy, made even weaker by imported price pressures and, to some extent, tighter fiscal policies.

The MPC is not making a firm judgment on that today. But the fact that it has not taken further action tells us quite a lot about the sticky wicket it still has to play on.