Inflation Rate of the Bank of England - Research Proposal Example

Running head: INFLATION OF BANK OF ENGLAND Customer inserts His/her name Customer inserts grade course Customer inserts Tutor’s name 18th November 2011 Introduction The report is designed to explain the inflation rate of bank of England through highlighting major findings and differences from August 2010 – August 2011. Inflation is usually a general increase in the prices of goods and services in any country rising to unemployment and high inflation to rate of only 2%. Taking into consideration the bank of England during the year 2010 the government came up with strategies such as setting monetary policy committee (MPC) to support the government goals of maintaining employment and high and stable growth and also to maintain price stability which is a committee that targets for the yearly inflation rate for the Consumers Price Index (Bernanke, 2003). However, the CPI inflation of 2010 is said to have remained above 2% target even though high prices of oil, depreciation of the sterling pound and because of the restoration of the standardization of value added tax to about 17.5% stemmed up to effect of down pressure on prices of commodities and wages thus affecting 2011. Despite CPI Inflation of 2010 moving up, in 2011, CPI inflation rather remained above 2% of the target and its output grew slowly while the global recovery activities continued to rise even though the pace in the growth slowed and the pace within the euro zone increased. However, 2011 is faced by numerous challenges for instance the squeeze in real income arising from house holds and wishes weighing down on domestic demands. The analysts further are prospecting that 2011 might have some possibilities in the sense that, growth domestic products could grow rapidly due to expansion in monetary policies that will be taken by the government. Findings and Analysis The research conducted showed that from May 2010 to may 2011, MPC had held a Bank rate of about 0.5% and maintained its stocks from the purchased assets at about 200 billion euro’s. Nonetheless, considering credit markets and financial the analysis shows that in 2010 the financial conditions thus remained strained even though at some point they eased because of certain stress tests over the EU banks. In comparison, 2011 the strains of the financial markets thus intensified amid heightened concerns on the fiscal positions regarding several euro zone countries. It is noted that the 2011 strains thus eased somewhat following an announcement that there would be support package by the euro zone leaders. The research of 2011 showed that UK banks raised less wholesale term funds and credit conditions for small businesses and households thus remained tight while in 2010 the banks continued facing several challenges that are related to refinancing substantial levels of maturing their funds. However, in 2010 the ten year gilt fell and also did the equities while in the corporate sector the bonds spreads widened exception to 2011 where the banking rates thus lowered and the ten year governmental bonds yield did fell to record lows and the credit growth together with weakness in broad money persisted (Coy, 2005). However, research indicates that, in 2010 the expansion in the global demand and in the world traded did continued but the pace of the recovery thus remained uneven. This case continued to 2011 with the global demand continuing despite the pace of expansion slowing down. In addition, in 2010 the trade performance in England banks appeared to be disappointing. During the financial crisis of 2010 the consumptions of households thus increased in savings thus its net investments raised sharply during the financial crisis as the economic outlook deteriorated while the credit became unavailable. The substantial depreciation of the sterling pound, the net trading was estimated by the ONS as to have reduced the England banking system and even though business surveyors and the manufacturing output being consistent with the strongest net trade performance. In 2010, it was estimated that the levels of the consumptions in households spending did fell by a substantial amounting to 5% but seemed to have stabilized in the beginning of 2011. In 2011, most businesses investments did increase sharply making the pace of de-stocking to ease. In 2010, analyst suggests that the level in capital expenditure also remained in a substantial rate below the pre-recession peak. 2011 in its hand was slowed down by the disruptions from global supply chains because of Japanese earthquake and the tsunami with the squeeze in oil prices (Bernanke and Mishkin, 1997). Analysts state that 2011 has a major setback from weaknesses in labor and also from housing markets though not as much as in 2010. Some business surveyors and trade data personnel also suggest that growth of the UK exports is slowing down due to the world demand. As compared with 2010, in 2011 there has been a problem with private homes whereby the demand is falling down because of the squeeze in real incomes. However, the government has cut down on stock building to companies who offer business spending and investments thus affecting the domestic homes. Unlike in 2010, analyst indicate that GDP of 2011 has increased by a substantial amount of 0.2% and this has cause increase in outputs due to existence in number of one-off the effects. This has aspect has portrayed that underlying output of 2010, in this year it has grown at the rate that is below its historical average. Analysis shows that, committee project designed for 2011 have restated of the availability of condition for taxes and spending that is set for budgets of March 2011 in the sense that the plans will be used as to offer similarities within 2011/12 and that of 2010/11 as compared to that of 2010 June budget that had projection on somewhat larger and faster reduction in the borrowing than of Match budget. In 2010 the outlook for GDP growth was thus estimated to have risen to around 1.1%. Analyst suggests that the pattern of growth could have been affected by a number of some temporary factors. In 2010, the committee indicated that England bank rate did followed an implied path forced by market interest’s rates together with the assets that were purchased through insurance of the central bank reserves that remained to be at 200 billion pounds. It was found out that if there would be a considerable stimulus attained from the monetary policy in conjunction with expansion in the worlds demand and with the fast depression of the pound the recovery could be sustained to 2011. However, with the strength in growth, there would be a likely hood that fiscal consolidation would be tampered by the existence of persistent credit conditions. As compared to 2011, growth will be sluggish because of the squeeze in household real income thus growth in GDP will gently start picking up with the underpinning of the steady recovery of the economy approaching the external demands. Like in 2010, the fiscal consolidation will dampen activities throughout the focused period where the consumer growth will slowly increase as the drag obtained from the real income growth due to high inflation dissipates. As compared to 2010, the output growth will remain uncertain thus raising a high risk in the prospect for the global demand that will come from euro area and an amount of substantial challenge from member countries as they fight to ensure that fiscal positions remain and also for the preservation of stability of the banks. In term of domestication, the strength of the recovery process will depend upon the extent at which households will be required to adjust to the 2010 falls in their normal income to that which is associated with financial crisis together with fiscal consolidation. Banking system in 2011 will thus depend upon the desire of the companies initiating differed projects and through increasing capacity to those sectors that benefits most from rebalancing of the economy thus be sufficient to support the recovery process of the business investments against any backdrop of the modern economic expansion. In 2011, the outlook of the households and for business spending will also depend upon the extent under which the availability of the bank credit will improve and the cost to fall (Baumol & Blinder, 2006). Finding of the banking sector shows that England banks will still continue to face numerous challenges with the respect to their funding and in capital positions inclusive the one related with sovereign debt expansion. However, the committee of European banking supervisor stressed that 2010 stress-test suggested that the England banks experienced sufficient capital that was meant for absorbing plausible future shocks in terms of the macroeconomic environment. However, in 2011, England banks will try to solve the challenges of funding and capital positions by reducing the debt expansion. In terms of labor costs the 2010 report showed that despite the wage growth rising from 2009 there they did subdued in a few months and this caused pay settlement to remain weak with the increment from more flexible elements of payout. However, in 2010, the bonuses might have risen because the employers helped bring the bonus period ahead of the month of April which is the top 50% tax rate of the income (Monetary Policy Framework, 2008) Furthermore, findings of 2010 showed that the influence on wage growth had positive impacts on companies going by the facts that they did cut back of the flexible elements of payout during the period of recession through adjusting work patterns which matched with weaker demands. However, in the same year the resultant pay bill did fell as the companies reduced working hours thus making the England banks to experience downward pressure over the earnings growth. In contrast, the earnings of 2011have risen to about 2.5%. However, in this year as compared to 2010 there has been increase with the payments in the private sectors unlike with the companies of 2010. This has risen to 0.4% of the 2010 whereby the rise in settlements of 2011 has largely reflected a move from a single period known as the pay freeze to around 2% and 3%. However, the regular pay drift emanating from earnings excluding of the bonuses and settlements has shown to be somewhat lower than it was in 2011. Nonetheless, the house hold credit conditions provided by England banks in terms of the total costs of loans to the individuals was broadly unchanged in 2011, as compared to 2011 where the stocks for loans were changed. I 2010 there was increase in corporate credit whereby the lenders did respond to credit conditions though there was deterioration credit availability. In 2010 the developments of the mortgages market suggested that lenders had experienced a very tight because of the rise in the cost of high risk in loans as will be in 2011 where the cost will not go very higher in spite of the increase in the inflation rate. With aspects of money there was a weakness in the year 2010 between the periods of growth rate where there was a significant increase in money holdings. In 2011 there was weakness in the euro because of underlying trends caused by long-term debt and also with the equity assurance. However, the non-bank investors in 2010 bore down on their deposits and also on the aggregating broad income. As compared to 2011, in 2010 PNFC and household broad money remained weaker than it was as it was on GDP which showed a significant rise to around 0.3%. The financial balances of 2010 did move in a sharper manner whereby through the rise government borrowings helped increase private non financial organizations and households to increase their investments and the net savings. In contrast, 2011 financial balances also moved higher although fiscal consolidation and net borrowings increased unlike for 2010 where the borrowings declined thus offsetting adjustments taking effect on the financial balance sheets. Considering the 2010 investments, it was noted that the business investments accounted that 60% of the total investments had increased by about 8%. It was suggested that the rise in investments might have been caused by the increase in importation of machinery and also since the pound depreciated. Considerably the rise in investments could have been because the weak demand for the companies tight credit conditions, company outputs and heightened uncertainties. More so, the business surveyors suggested that demand output had become very minimal due t constraint investment plans of 2010. However, for 2011there have been more emerging economies as compared to 2010, this year it has grown higher despite growth slowing from the half of 2010. The domestic demands of 2010 trough the monetary policy did affect inflation process by making a greater impact on the nominal demand unlike what is seen in 2011 to increase the nominal demand (National Statistics, 2008). By considering the banking capital of 2011, it is stated that England banks have greatly improved their resilience through raising their capital ratios and also by reducing their leverages. For instance the ratio of the UK banks assets did fell slightly in year 2010.In 2011, England banks have thus reported a general raise in their core Tier 1 assets proportions in the beginning of 2011 H1 interim effects. Unlike in 2010, UK banks in 2011 have exposed themselves to private sectors that deal with euro area periphery economies thus posing a great risk to other countries off their balance sheet positions due to their links to their banking systems. Nonetheless, in 2010, the indicators of household distress and those of corporate were unstable unlike in 2011 where they are very stable. In 2011, there have been reports that write off rates on the loans towards private and non financial corporations and also in the sector of unsecured loans meant for households have felt in slightly in this year as compared to 2010 (Mishkin, 1995). Recommendations and conclusion The analysts state that for growth in domestic demand to recover in 2011, the prices of energy should be stabilized and the recovery in income through settling the historical average rates should be taken into consideration. However, substantial uncertainties for example, outlook wages, employment and inflation and real income growth should be observed in 2011. By dislocating the euro area and also subsequently slowing euro area activity will have a direct impact on the UK exports thus slowing down the rate of inflation. In 2011, analysts recommend that the pricing decisions from companies will affect inflation if external pressure and costs of labor is not monitored. Taking the instance of 2010 where the business profit margins did erode during the period of recession then 2011 will have to check on costs of the imported goods and productivity. It is highly recommended by the researchers that for 2011 to be effective and less of inflation it will be best if the costs of energy and that of imports as is checked in the sense that oil companies will be required to reduce their costs to around 8% since the oil prices are supported by the economic activities. However, in 2010 it was seen that the costs in domestic electricity and gas reduced to the annual inflation since the month of September. In 2011, it is seen that the cost has risen to around 5% therefore there is need to stabilize the prices through the economy is growing at a higher trend than of 2011 (Auernheimer, 2003). References Auernheimer, L. (2003). The Honest Government's Guide to the Revenue From the Creation of Money: Journal of Political Economy, Vol. 82, No. 3, May/June 1974, pp. 598–606. Baumol, W., & Blinder, A. (2006). Macroeconomics: Principles and Policy, Tenth edition. Thomson South-Western Bernanke, B. S. and Mishkin, F. S. (1997), Inflation targeting: a new framework for monetary policy in The Journal of Economic Perspectives, vol. 11, no. 2 Bernanke, Ben S. (2003). Perspective on Inflation Targeting: Annual Washington Policy Conference of the National Association of Business Economists. Washington, D.C. Coy, Peter (2005). What the fuss over inflation targeting: Business Week (The New Fed). Retrieved 2011-11-04. Laguerodie, Stephanie and Vergara, Francisco. (2001).The theory of Price controls: Review of political Economy Mishkin, F. (1995). The Economics of Money, Banking, and Financial Markets, New York, Harper Collins What Is Inflation? 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