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The writer is an external member of the monetary policy committee of the Bank of England
For a small open economy like the United Kingdom, the impact of American prices on inflation is somewhat ambiguous and influenced by a number of factors, including exchange rates. Economic theory suggests that US unilateral prices should increase the US dollar, the exchange rate compensating for part of the prices on other countries. But so far, the opposite has occurred.
The way in which central banks could react to American prices when defining inner monetary policy therefore partly depends on the opposite of recent exchange rates.
Modeling the impact of American prices on the British or global economy is heavy with uncertainty, especially when prices and countermeasures are quickly evolving. For the United Kingdom, the responses of other countries at American prices will also strongly influence the impact on growth and inflation.
There are various channels by which American prices are likely to spread through the British economy. Persons placed on British goods will increase their costs compared to substitutes produced by the United States. This is likely to apply for British export SAP. Other tariffs would also see the request of their goods, and the negative impact on income would still weaken the request for British goods. The greater the commercial distortions, the greater the world demand for global demand. Other things being also equal, the result is likely to be lower and inflation in the United Kingdom.
But other things may not be equal. Like I Recently place yourselfIf foreign producers are unable to sell so profitable in America, they could engage in the diversion of trade. They can reduce their prices to access alternative markets, reducing import costs for the United Kingdom and providing disinflationist impulse.
The impact of the commercial diversion on production is less clear. Cheaper goods should stimulate the real revenues and consumption of the United Kingdom. But they could also make more difficult for the products produced at the national level of competing, dragging the activity.
If the prices lead to disturbances of the supply chain, we could expect the price peaks to cascade through production networks, which increases growth and prices. The fragmentation of exchanges also reduces the repercussions of knowledge between countries and drags competition. All that is equal to the rest should reduce productivity growth and increase inflation.
These channels are likely to be consistently consistent, whether or not there are reprisals for American prices. But economic theory suggests that this is not the case for exchange rates.
If the United States imposes unilateral prices on other countries, the American demand for currencies should drop and the dollar should appreciate. This would make the United Kingdom relatively more competitive while increasing import prices in the United Kingdom. This would in turn increase growth and inflation.
If generalized countermeasures are imposed in the United States by other countries, the demand for American imports could fall, sending the dollar lower. Sterling's relative assessment would lead to competitiveness and growth of the United Kingdom. The United Kingdom is also likely to reduce import costs, to temper inflation.
This is theory. But at the back of the “Liberation Day” of US President Donald Trump, the dollar was weakened. In the midst of high volatility after the announcements of April 2, the anticed US dollar (DXY) expected and the real DXY have considerably diverged. Sterling has strengthened compared to the dollar, remaining above pre-liberation day levels.
The United States is the largest trading partner with the only British country, but the EU is the largest trading partner in the United Kingdom as a whole. Movements in the euro therefore have an impact on growth and inflation in the United Kingdom. Following the American tariff announcements, the euro appreciated compared to the Sterling book, compensating for part of the impact of the weakness in dollars in the exchange rate index (ERI), the weighted measure according to the Sterling book compared to a basket of currencies.
If the dollar had to weaken moreBritish growth and inflation trail would probably be greater. If the dollar gathers instead, the disinflationist impulse of prices in the United Kingdom would be relatively less significant.
It is too early to say what motivated exchange developments and if they are likely to reverse or persist. During a recent hearing of the Restricted Treasury Committee, President Meg Hillier stressed that the use of “uncertain” in the report on the monetary policy of the Banque of England had almost doubled between August and February. Given recent developments, this reference should further increase.
