In a recent speech, Charles Bean, the chief economist of the Bank of England and a member of the monetary policy committee, argued that the increasing effects of globalisation on inflation could reduce the efficacy of domestic monetary policy. The implications are that larger swings in domestic output might become required to hit inflation targets.
An increase of this magnitude in macro-volatility, in contrast to the trend of the last 10 years, could push up risk premiums on financial assets. In this paper, we consider how globalisation has effected inflation in the UK and consider some of the challenges to the monetary policy framework that could emerge in the future.
The inflation targeting monetary regime in the UK is al-most 10 years old. Most commentators would agree that it has been a success. Apart from the first two years of the new regime, inflation has been above target for just three brief periods, in 2003, over the second half of 2005 and throughout most of 2006. The stability of inflation has had a beneficial impact on inflationary expectations, which have trended down over time. The Bank of England’s own survey of inflationary expectations has shown a stable relationship between inflation expectations and the inflation target.