1. Dr Andrew Sentance Former Member Monetary Policy Committee Take Five: 5 reasons to worry about UK inflation Presentation to M&G Inflation Conference London, 4 October 2011

2. Reasons to worry about UK inflation Inflation performance Inflation performance Global inflationary pressures Global inflationary pressures Sterling Sterling Persistent services inflation Persistent services inflation The MPC The MPC

3. UK inflation significantly above target Source: Office for National Statistics % per annum increase in consumer prices index

4. UK economic growth * Weighted average of manufacturing and services output % per annum change in economic activity

5. Employment in UK recessions Source: Office for National Statistics, Labour Force Survey Index of employment, 100 = cyclical peak Number of quarters from employment peak

6. Rebound in nominal demand Source: Office for National Statistics % per annum change in key measures of nominal demand

7. High inflation squeezing retail volumes Source: Office for National Statistics % per annum growth in retail sales (3-month ave)

8. Global inflation on the rise % per annum change in consumer prices Source: The Economist

9. Real oil and commodity prices Source: IMF and Thompson Datastream. Deflated by US consumer price index; 2000=100

10. Global primary energy consumption Source: BP Statistical Review 2010 Million tonnes oil equivalent

11. The rise of Asia *: Includes Australia, China, India, Indonesia, Japan, Malaysia, Singapore, South Korea, Taiwan Province of China and Thailand. Source: IMF World Economic Outlook Percentage share of world GDP, current market prices and exchange rates

12. Shares of world GDP and population *: Apac G10: Asia-Pacific G10, including Australia, China, India, Indonesia, Japan, Malaysia, Singapore, South Korea, Taiwan Province of China and Thailand. Source: IMF World Economic Outlook, World Bank and Eurostat. 2010 figures

13. Prospects for 2011 and 2012 % per annum change in GDP, latest consensus forecast * US, EU and 11 other major economies making up 85% of world GDP Source: The Economist

14. World economic growth * EU, US and 11 other economies accounting for 85% of world GDP Source: IMF World Economic Outlook, April 2011, and The Economist % per annum change in GDP in G-13 economies*

15. The global recovery in context % per annum change in GDP * US, EU and 11 other major economies making up 85% of world GDP Source: IMF and The Economist

16. Monetary policy, the global economy and inflation Global economy Cost of imports Demand Pricing climate Exchange rate Domestic demand Expectations and credibility UK inflation Impact of monetary policy

17. Sterling depreciation since 2007 Rebased to 100 in January 2005 Source: Thompson Datastream and Bank for International Settlements *: Effective exchange rate

18. Episodes of Sterling depreciation Index, base year = 100 Number of years from start of period Source: Bank for International Settlements

19. Euro/UK inflation differential & exchange rate Source: Thompson Datastream *: Euro-Sterling exchange rate is expressed as the deviation from its average over the same period.

20. UK goods price inflation Source: Office for National Statistics % per annum change in goods prices

21. Persistently high services inflation Source: Office for National Statistics % per annum change in consumer prices

22. Reasons to worry about UK inflation Inflation performance Inflation performance Global inflationary pressures Global inflationary pressures Sterling Sterling Persistent services inflation Persistent services inflation The MPC The MPC

23. Large official inflation forecast errors Source: Bank of England Mean of forecast percentage annual increases in consumer prices

24. Unemployment in UK recessions Source: Office for National Statistics, Labour Force Survey Unemployment rate, % of labour force Number of quarters from employment peak

25. Capacity utilisation in UK economy Source: Bank of England Bank of England Agents’ scores relative to normal

26. Wage growth picking up Source: Office for National Statistics % per annum growth in private sector average weekly earnings

27. What is wrong with the MPC? Policy-setting no longer consistent with 2% inflation target and mandate Policy-setting no longer consistent with 2% inflation target and mandate MPC seems prepared to inject more stimulus even when inflation is more than double target level MPC seems prepared to inject more stimulus even when inflation is more than double target level Poor forecasting record, yet forecasts critically underpin current policy judgements Poor forecasting record, yet forecasts critically underpin current policy judgements Benign neglect of the pound Benign neglect of the pound No track record of taking tough monetary policy decisions to underpin credibility No track record of taking tough monetary policy decisions to underpin credibility Dominated by internal consensus around Governor Dominated by internal consensus around Governor

28. Conclusions UK inflation performance reflects structural problems in current inflation target regime UK inflation performance reflects structural problems in current inflation target regime MPC has used its discretion to redefine inflation target framework post-financial crisis MPC has used its discretion to redefine inflation target framework post-financial crisis External members cannot effectively counter a strong internal block dominated by the Governor External members cannot effectively counter a strong internal block dominated by the Governor There has been an overt policy of benign neglect of the pound, which has fuelled inflation There has been an overt policy of benign neglect of the pound, which has fuelled inflation UK monetary institutions and practice have an inflationary bias – investors beware! UK monetary institutions and practice have an inflationary bias – investors beware!