Who Really Pays When Interest Rates Go Up? – Bank of England Rate-Setter

21:19Dr Swati Dhingra:And that then means there's less consumption, less pressure on prices, and that's what's going to slow inflation down. So this is not a costless thing we're doing. And we are aware of it, and it's totally fine, I think, to be really honest about it and say that, look, simply raising interest rates is not a costless proposition. It is going to have an impact on people who will possibly, as a result of this, see slower job growth and see slower wage growth. And we're making that decision because we think that the cost of living crisis needs action now. So I think those are the really difficult decisions you have to make every now and then.

21:56Dr Swati Dhingra:And I'm afraid we're now in that cycle where these sorts of shocks are happening a lot more. It's just a geopolitically more charged economy. And as a result of that, we're seeing some of that unfold. I hear you say that a lot of the shocks in recent times are external. We don't control them. They're around essentials. And then say, we're raising interest rates to make people poorer so that they can't buy those essentials, but they're essential. So how does raising interest rates and making people who are struggling to purchase essentials poorer help reduce shocks like oil and energy prices that we have no control over?

22:31Dr Swati Dhingra:I mean, that's a great question. And I think that's really why there have been divergent views as well, that we're grappling with a difficult situation. So the question is, how much do you want to get inflation under control? How quickly do you want to do it? Interest rates help with that, which is that, yes, they will slow the economy down. They'll slow it down, not just through what happens to commodities prices, but through other prices that people are consuming. So, you know, maybe tomorrow you're going to make a decision. I'm not going to go to a restaurant because I can't afford it. And instead, I will, you know, take a nicer meal at home instead.

23:06Dr Swati Dhingra:So those are the kinds of margins you're playing on. They're not big margins. And as a result of that, those who are suffering because of it will bear the pain. And that is something to be, you know, that is what makes this a much harder decision. And that's one of the main reasons we've had different views on how quickly one should go to try and control inflation. My general view has been, we should go slower simply because we're dealing with a supply shock. And I'm worried that if we, you know, keep our foot on the brake for too long, that would mean that there's also lower investment, lower supply capacity in the future.

23:41Dr Swati Dhingra:Now, you might argue, well, that also comes then with a risk that if you aren't acting enough, that many of that, much of that behavior of, you know, expecting prices to continue to rise will feed on themselves, in and of themselves and take a life of their own. That's possible. and those are the kinds of risks you've got to make judgment calls about. And that's why we need all of that data because if we didn't have that, we would be basically not doing evidence-based policymaking. At least we're hoping we're getting those things broadly right. I don't think we can be perfectly right, but I think we're getting to be in the ballpark of getting those sorts of decisions right.

24:18This is what they mean by the blunt tool, right?

24:20Dr Swati Dhingra:Exactly. I was just going to say, you just said we have to look at all the data. What are the most important things you're looking at when you're deciding these interest rates? So one of the things that I think people would look at would be the price data itself. And it's not just the consumer prices that we are targeting that we look at, but also, you know, what is happening to upstream prices. So what's happening to global prices? What's happening to prices that businesses are charging each other? And because these happen to be upstream prices, it's actually really great that you get a much more forward-looking indicator before things start to show up in consumer prices.

24:55Dr Swati Dhingra:So that's one aspect of what we look at. The second aspect is the activity data. Now, if we think consumption is booming, we would have a much more different reaction to raising interest rates as opposed to if we thought consumption was really slow and weak. So those are some of the things that we have been looking at more recently. combine that with also what is happening in the labour market. I think one of the reasons for looking at the labour market is that wage growth gives us an indication of where things are headed, where future costs are headed. It's also something we want to do, but we find much harder to do, which is also look at what is happening to profit margins of businesses.

25:33Dr Swati Dhingra:The problem with that is it's not the best measured object. So you might end up getting a not so great read on where the economy is headed. So I think those are some of the things that people would routinely look at. And then depending on the person, you might give more weight to one aspect versus another. Is there any particular measure that you might look at that your colleagues might not, or that you wish you had? Is there one thing that you could say, if I had that information, I would know what to do? I wish I had lots of real-time information on business pricing. that would help us anticipate some of the price trends that we see that we are trying to target.

26:11We can't get that. Sorry, just to clarify, what do you mean by business pricing? Like the prices they set or?

26:19Dr Swati Dhingra:So let me give you a very simple example. Think of the price of bread. You know, really sort of basic essential commodity that we want everybody to be able to purchase and then the quantities they desire. When the Ukraine war happened, one of the things that really increased in prices was wheat, because Ukraine was a big supplier of wheat. So if we had known the wheat price market much earlier and seen how that comes through to the UK market, we would have had a much better way of thinking about what happens to food price inflation in the future. Those are objects which are actually very difficult to measure.

26:57Dr Swati Dhingra:And typically, it's not as though the UK is the only country that doesn't have those prices. Many countries, even some of the most advanced economies, don't quite have those prices because getting international prices and matching those up along supply chains is a very difficult ask. That's not to say it can't be done. We earlier didn't used to have VAT data. Now we have value-added tax data, which lets us link up which firms are selling to who, and we can trace those transactions through. And once you can start tracing those transactions through, you're already sort of almost like six to eight months ahead of the economy by basically anticipating things that you can see in the data.

27:35You see it coming down the line almost.

27:37Dr Swati Dhingra:Exactly. These are upstream. We know they're going to flow downstream at some point or the other. And how much they flow downstream is actually extremely critical for the decisions we make because to some degree, you know, as a monetary policymaker, you're not trying to influence what happens to the price of bread versus the price of milk. That's not the kind of control you have on the economy. Instead, what you're trying to ensure is that it's not as though lots of price increases are being passed on to consumers, and that's then causing some kind of price spiral that, you know, would embed inflation much more permanently into the economy.

28:11Dr Swati Dhingra:And the way and when you're able to trace these upstream prices down to the downstream prices, you get to know how quickly these things are moving, how much they're moving. And that's really where we can actually play a role, prevent them from getting out of control. It's like going to the source almost. So if you've made an action on interest rates, maybe you would be able to go further up and see that implication, like the impact sooner as well. Exactly. Yeah. You said like how much is the impact feeding through? Do you mean are businesses swallowing costs or absorbing them instead. Or one of the criticisms in the cost of living crisis around COVID was profiteering from businesses.

28:54People thought that Tesco's and such were taking advantage of the widespread narrative that prices were going up and just making more and more profit.

29:02Dr Swati Dhingra:During the Ukraine war time, there was a lot of talk of profiteering and there were some particular episodes where the Competition and Markets Authority actually looked into what was happening with pricing. I think overall, you did not see when the data did come out as to profitability, margins that we can measure in the best way possible. You didn't see any kind of runaway inflation coming from that. You actually did see that the prices that were coming at the border were increasing very sharply. That then was feeding into higher prices for what businesses charge each other, say what Tesco was buying from its own suppliers.

29:41Dr Swati Dhingra:there was some dampening happening if anything of some of those price increases and then when you got to the next bit which is what were producer what were these what was tesco passing on to consumers you saw even some more dampening so i don't think there was the kind of runaway profiteering that you know that often sort of is talked about that's not to say nobody was making profits i mean prices were rising very fast and obviously somebody was getting that price increase i don't necessarily think it was happening it was something which was happening domestically so much So what is happening now is actually somewhat, it's been somewhat surprising to me because we did see during the Ukraine war, and this is not just during the Ukraine war, more generally when you have big energy crises, those prices get passed on, the high global energy prices get passed on to consumers fairly quickly.

30:28Dr Swati Dhingra:But this time we're not seeing that sort of unfold quite yet. With the Middle East, you mean? Yes. So we have seen input prices go up. We've seen a lot of dampening of that onto business prices. and we've seen somewhat more of a dampening of that to consumer prices too. Now that might be something to do with the fact that when we were coming out of COVID it was a much hotter market, much hotter sort of economy and now we're in a much weaker economy so you know businesses aren't feeling that sense of confidence to pass it on to consumers either. I think these are the things we're going to have to see very closely and see how they develop because that's actually what's really important for us to understand for our rate decisions.

31:05Okay I want to come back to the consumption point because obviously part of the decision is you know people spending and what you're saying you're trying to influence spending and one of the examples you gave was if we increase the cost of a mortgage we basically stop people from being able to spend in the economy a third of people own their home outright and they tend to be the older people because they've had time to pay off their mortgage are they not the consumer base that has the largest spending power one thing i look at is you know the inflation is impacting the poorest people the people who spend the least and then the action is not targeting those that don't have debt who have lots of disposable income is it targeting the wrong people this is absolutely why we need not just interest

31:48Dr Swati Dhingra:rates as policy tools when we have cost of living crises we need these other things and which is why things like you know energy subsidies which were given to more vulnerable families are really important typically lower income people you know for obvious reasons because they don't have cars and other fancy things tend to spend a higher fraction of their budgets on food, on energy, things that really sort of, you know, get impacted during cost of living events that we're discussing. And the middle income people are the ones who have the housing costs, the mortgage rates and so on, which then go up when we react with interest rate hikes.

32:25Dr Swati Dhingra:So disproportionately, these two groups of people will really suffer during a cost of living crisis and from our policymaking as well. and I am afraid that yes those who have those who do have own their houses outright will typically tend to be more protected and because of the way you know intergenerational inequality in the country has moved over the last say a few decades that would also mean younger people are going to be much more impacted than older people. Do you know when the tone around the Bank of England talks around inflation and that do you see that people reduce their spending anyway is it a bit like a hose pipe ban?

33:02You know, when they say, oh, we're running out of water, stop watering your gardens, and people just kind of do. Does that action itself reduce spending?

33:12Dr Swati Dhingra:Some people think that that is one way that the economy reacts, which is that people see the bank's decision, and then they react to that, either because they think, you know, it changes the expectations of where the economy is going to head. I've always found that I have a lot of faith in people's intelligence and their own knowledge of their budgets. And I think in general, that's very heavily influenced by what they see in, say, the supermarket when they go shopping. And that's where you also see that inflation expectations, which is where what do people expect inflation to be in, say, a few months or a year's time, tends to be highly correlated with what they're seeing with spot inflation.

33:49Dr Swati Dhingra:There is another literature out there which does try to use inflation expectations, you know, asking people, taking a lot of survey data about where they think inflation is going to be headed. And some of that literature does find that people react to Bank of England decisions or Federal Reserve decisions, but which way they react to a rate hike is actually pretty strange in the sense that sometimes they react, you know, with tightening their belt when they see an interest rate hike, and sometimes they react in exactly the opposite way, which is that they think that there's going to be more inflation and they kind of really sort of tighten their belt a lot more, but not because they think rate hikes aren't going to work, but because, of course, They think that's giving them information that now the bank is taking it seriously that inflation is coming.

34:31Dr Swati Dhingra:So I don't think necessarily our policy rate decisions should be based on how people might interpret our decisions. I think we should go by what the evidence is telling us about where the economy is going to be headed in the next few months. I think that's a much more safe proposition rather than trying to become psychologists. So how do you think individuals should react to rate decisions? Because we're told about them. the news cycle obsesses over them, right? And people have an action bias where they think, okay, I've got information, I need to do something. What should a normal person do with that information?

35:06Dr Swati Dhingra:I think they should take it much more as a way of thinking about where the economy is headed. And which is to say that within that, you know, a lot of people at the bank have looked at a lot of data and tried to distill that into where the economy is headed. I think that's the way you should interpret the interest rate decision. But with a grain of salt that your own circumstances can look very different. We are setting one policy for an entire population that need not reflect people's personal circumstances. And exactly for the reasons that we just discussed before it, that if you're a young person or an old person, if you're a you're not a homeowner, your inflation numbers are going to look very different.

35:52Dr Swati Dhingra:And we saw it through this cost of living crisis that early on, the people who were really impacted by the cost of living crisis were actually poorer families. Then came the period when interest rates had been hiked. And then who was impacted were in fact, people in the middle income distribution, the ones who basically had mortgage rates and had rents, really high rents to pay. So don't take it as anything more than just a general view of where the national economy is headed. It's not about your personal circumstances. So you said that people should look at the rates as a kind of an inclination of where you think the economy's heading.

36:27So could you summarize, if you're holding the rate, raising it or lowering it, where do you broadly think the economy is going?

36:36Dr Swati Dhingra:I find that really hard to answer for the reason that you're trying to boil down what are very nuanced discussions into one number. So it's always going to be hard. I think one way of thinking about it is that typically if a central bank is raising rates, they think inflation is going to rise in the future. Now, the question is, what is it going to rise due to? Is it because global energy prices have increased or is it because the economy is running too hot? If the economy is running too hot for pure demand reasons, for example, you know, AI is booming and now suddenly you've got loads of growth and therefore prices are rising, that would actually be pretty good for you because your incomes are probably going to rise as well but if it is happening because energy prices are rising globally that probably is going to mean that your own incomes are not going to keep up with the pace of change that's happening globally so you know your living standards might need to fall and therefore your budgeting has to become really important at that point.

37:35You say that housing is the biggest cost but CPI doesn't includes housing costs, CPIH does. Is there almost like a contradiction in a sense of the act of reducing inflation is inflationary in people's lives? You're pushing up the major cost in their lives. But then the thing you're trying to do to reduce it is, do you understand what I'm saying?

38:00Dr Swati Dhingra:No, absolutely. And in fact, this is one of the criticisms that Paul Krugman, the Nobel laureate who wrote for the New York Times had. Well, I'm glad we agree. We're on the same page. Yeah, we're good. Housing costs are reflected in the inflation index, say, in the US. And you then don't want to be chasing your own tail. Is that right? Yeah, yeah, yeah. That is the correct. Yeah. So in our case, that's the reason for not using CPIH partly. That one, a lot of those housing costs are imputed. If you live in your house, we're having to say, take a, you know, the statistics office is saying how much should we value that house if you're living in it in terms of what your housing costs would have been had you not lived in the house and rented instead, for example.

38:44Dr Swati Dhingra:So in the CPI, which is what we target, which is the 2 % inflation target that you would have heard of, that would typically not include mortgage interest payments, that would not include housing costs for, say, outright owners, but it does include rents. So to some degree, one of the things that at least I remember doing when mortgage rates had really peaked right after the Ukraine war, was actually take out some of those rental numbers from the CPI so that we could get a much cleaner read in terms of, you know, what is the stuff that we want to influence, which is to keep price stability in control, and what part of the consumption basket is something which is mechanically reacting to what we're doing as opposed to something which is reflecting where things might be headed in a year's time.

39:31How well do you think the consumption basket or any of the measures, CPI, RPI, CPIH, captures inflation as a measure? How accurate do you think it is?

39:41Dr Swati Dhingra:Not fully accurate, of course, because household costs are different from what the consumer prices that we're trying to measure. And this is something where I think the statistics office has made a lot of progress. And some countries do do that, that they use the household cost indices, which is to say that, you know, depending on whether you're young, you're a homeowner, you have children or you don't, you would have very different household budgeting costs. And maybe that's what we should be looking at. And that's what we should be thinking about. So I think that's sensible. I think it's kind of harder to do that in a very definitive way than, you know, one number, which is then, you know, which then becomes a much more summary measure that everybody can get behind.

40:23Dr Swati Dhingra:so but i think um one thing to keep in mind is that we are looking at all of those other things as well because typically what happens during cost of living crises is that even if the cpi is looking more muted and household costs are rising a lot more because say your rents or your mortgage payments are rising a lot faster then we will be able to get a read on that through those household cost indices as well as through consumption so we have very detailed data You look at everything. You're not just looking at... There's a headline measure, and that's what everyone kind of latched onto, but you are more broad.

40:56You don't just focus on CPI.

40:57Dr Swati Dhingra:Exactly. And in fact, you know, when somebody asks me, oftentimes I get asked this question that, oh, it's such an easy decision to make. You typically only go a few basis points up or down, and that's a pretty easy policy to set. I mean, it sounds easy. Who says that to you? I was thinking, who says that to you? A lot of my economist friends say that. What decisions are they making? What dinner, what to have for dinner? But imagine if you were... If you were doing some of the other treasury type policy decisions about, you know, how much should we think about planning restrictions nationally as opposed to locally?

41:29Dr Swati Dhingra:Those are very difficult decisions to make. And that's where, you know, different communities might have very different views. But they get to take the time. You have to make a decision every six weeks. Do you know what I mean? And you can't not. So I think. I'm glad you think my job is hard. But I wanted to make you believe that it's even harder because you are actually sitting down and thinking through all of those various things that you said, which is not just looking at the CPI number. I am actually sitting down and looking at consumption patterns of different households. I am actually sitting down and thinking through how much are social rents moving, how much are private rents moving, how are they going to unfold.

42:07Dr Swati Dhingra:hold. So that's what takes up a lot of time. And that's what makes it much harder and makes it also much more likely that you disagree with others on the committee. You just mentioned recently that the Bank of England target inflation rate is 2%. What's so special about 2 %? It's an excellent question that I don't have an excellent answer for. Let me give you the answers that I do have that I think are sensible. So there's not a precise number two, which is sacrosanct. And in fact, it shouldn't be. For the reason that the key idea is you're trying to maintain price stability in the economy. Now, does that mean that the average person or the average household who's thinking about how to plan their budget for the next few months is thinking about some way of defining inflation by 2 %?

42:59Dr Swati Dhingra:Of course not. And I think most of us can agree that that's not how most people behave. I don't think about that when I do my own budgeting. The key point is that you want to keep price growth contained so that people can plan properly, businesses can plan properly, they are not having to buy today because they think prices might go out of control tomorrow. I think that's fundamentally what you're getting at. 2 % is typically sensible a number or is a sensible ballpark of a number because there was a great talk I've attended which is the South African Reserve Bank invited me to go visit them a couple of years ago.

43:36Dr Swati Dhingra:And they were having precisely this debate, what should their inflation target be? They were in a band with 4 % being part of that band. And their point was, the governor's point in that event was that, look, 4 % people notice, 2 % people don't notice. Now, does that mean that people start noticing at 3.1 or 3.2? I can't give you a precise number. And most of the times we will not be able to give you a precise number because people notice inflation when they've had a recent inflationary episode, when they've seen things go out of control. So in that sense, I think two to four percent is a is a reasonable ballpark.

44:14Dr Swati Dhingra:I would believe you if you told me that, yes, people will not necessarily change their change the way they budget their housing costs or their other expenditures if if inflation was at 2 % or if inflation was, say, around even 3%. I'd find that plausible. There's also a second reason why 2 % might make sense, that you want some inflation, because many prices otherwise can't adjust. You know, when some prices don't adjust downwardly, they only adjust upwardly. Quality typically moves in the upward direction, and prices to some degree reflect quality as well. So some amount of inflation in that sense is sensible.

44:51Dr Swati Dhingra:But how much is good and how much is too bad, I think we can all agree beyond a certain point, yes, it's going to get bad. In certain bands, it keeps things under control. Some critics of inflation might point to China and the production capacity that came out of there and say that we missed a golden opportunity to reduce prices permanently. And we inflated into that essentially you know that prices could have been a lot cheaper in the west with with how the how china basically dragged down costs do you do you think we missed an opportunity there and that this idea that prices always have to go up over time is that true so even more salient than that is what happened with computers yeah you know computers used to be really expensive all computer related equipment used to be really expensive and at some point those prices just kept moving down or at least you started getting so much better quality for the stuff that you were paying for.

45:48Dr Swati Dhingra:What happened when China entered the world economy was that almost everybody benefited to some degree from that price level drop that happened. So even we got that. What it didn't mean was that that price level drop wasn't going to always be dropping every time. It was just a one off change that happened. We got some aspect of it. Others got another aspect of it. It also helped us then have more growth in some of the other parts of the economy, like services, which we don't necessarily buy from China. We're really great at producing them ourselves. And those prices benefited, those producers benefited.

46:25Dr Swati Dhingra:So in some sense, it's not obvious to me that we actually lost out. We saw growth in other parts of the economy. And that's really where most of our employment is. Do you not think that maybe policymakers saw an opportunity to inflate our money supply, say, in the face of lowering costs from China?

46:47Dr Swati Dhingra:There's very little evidence to somehow say that money supply directly feeds into prices. I mean, yes, to some degree, that's going to be true. A lot of people might disagree in the comments, but is that what you honestly say? You know, that if you print more money, say print crudely, I know that's not the process, but if you increase the money supply prices, is it not more money chasing fewer goods? One of the reasons that many central banks actually moved away from money supply targets was precisely because it wasn't necessarily one on one mapping to price stability. So in that sense, you know, whether you measure that through inflation or through other ways, that's actually not as it's a very straightforward theory.

47:28Dr Swati Dhingra:And somehow it always makes sense to think that, you know, if I give you more of something, you're just going to take that money and start chasing more goods with that same, with that expanded money supply and bid prices up. Now, to some degree, that makes sense. But I think that's more broadly true of demand in general, that if you're chasing a fixed set of goods with a much higher demand, you're going to bid prices up. So I don't think it's necessarily just to do with money supply. I think it's more generally to do with when the economy is running hot. that's what you're going to end up doing to prices.

48:01Dr Swati Dhingra:That's not such a bad thing, frankly, for the reason that that's what prices are for. You know, when the economy is running too hot and prices rise, that tells us, you know, the things that you want to buy are becoming dearer because actually there isn't so much of it. So in that sense, I think that's how we should approach prices rather than thinking that somehow you could manipulate them in ways that would benefit you. I mean over the long run you can't manipulate them in the short run you can make minor adjustments here and there create some winners and losers but you're not going to actually be able to change the physical amount that can only come through productivity and that's really where we should be focused if we want to really change people's living standards yeah okay perfect thank you because I'm sorry did that make sense yeah it does it does I mean it's you know you're very smart how do I put this and you do this all day so uh you know some of it will go over my head but I think you have a great way of explaining it I just I can hear the comment section as well and I can hear people saying oh Ukraine the Strait of Hormuz but the inflationary period that we have just so happens to um coincide with the biggest expansion of the money supply ever so to say that expanding the money supply doesn't cause inflation when we've got maybe it's correlation causation you know but the two things did happen in sequence so whenever I go for citizens panels that's one of the questions that comes up that there will typically be a monetarist in the audience who would want to say that money supply expanded very dramatically during that period and as a result of that what we saw was this runaway inflation so what I think some people do bring up is that as a result of what happened during the pandemic, when the economy looked like it was freezing up, we had to impose lockdowns, you know, as a nation, that's what we did.

50:00Dr Swati Dhingra:The same period of time, it looked like, you know, banks might get into trouble, firms might get into trouble, and a lot of COVID loans were made out in different forms, to banks, to businesses, to sort of, you know, the economy more broadly. And that was done with the intention that it was going to tide us over this very difficult period when, you know, otherwise people could have really lost their jobs almost instantaneously. So to deal with that, when the bank basically gave out these loans or when the Treasury did the same, you know, there was some sense in which there was more money floating around in the economy.

50:36Dr Swati Dhingra:And I find that plausible in the sense that, yes, those, you know, those loans were made out to some degree, many of those people were then able to pay their workers. And, you know, as a result of that consumption could be sustained when, you know, if a lot of people had lost their jobs, that would have been very difficult to do. So to the extent that that happened, there was some price pressure that came on. And as a result of that, we saw some inflationary impulse because of that. But I mean, it really stretches my imagination when people think that all of the a really sharp cost of living crisis that we saw was to do with this.

51:12I mean, the big thing that

51:14Dr Swati Dhingra:happened during the cost of living crisis is the really sharp electricity price increase we saw, energy prices. Then came the period when food prices really went up, you know, double digit food price inflation, 18%, I remember, was one of the numbers during the peak. That does not happen because a whole bunch of people are suddenly starting to consume more energy and more food i mean i just find that absurd or go eat 20 more food yeah i mean who does that and maybe for the average person they could go up five percent a bit more they might go to fancier foods but i really don't think that was actually what we were looking at and in fact if anything when you look at real consumption that people had to people were doing at that period There was a long period of time till about 2024 when consumption had not even recovered to pre-pandemic levels.

52:07Dr Swati Dhingra:So I just find that really hard to believe that somehow all of this money printing was suddenly creating all the success demand, which then meant prices were rising to the degree we saw. With that time, did a lot of people invest at that time? Did that have an effect on anything? We see saving rates were very high. There was forced saving going on. People were putting it in different places. that sort of goes away pretty much a little bit afterwards. So much of what you see happening in 23, 24 is really not explained by these kind of forced savings or investments that people were doing. What you are continuing to see even now is that consumption has been a lot weaker than anybody would have imagined it.

52:52Dr Swati Dhingra:And in fact, after the COVID period, what we saw in most economies that are similar to us, like in Europe or in the US, we actually saw consumption recover pretty fast and people started, people's living standards were basically up again. In the UK, we actually saw a period where consumption really did not recover. There was a long period where it didn't even get up to pre-pandemic levels. And that is very hard to square with saying that, oh, inflation must have been caused by this excess demand. There just wasn't that kind of excess demand. So why does the UK, why has the UK struggled to recover?

53:30Why is UK inflation stickier than up here? It's like we seem to be having a harder time of it.

53:37Dr Swati Dhingra:I wish there was one answer I could give quickly, but it hasn't been that. And in fact, that's what I've learned, how much subtlety there was. There was a period where, you know, in 23 or something, loads of people were saying, and particularly that it was this really loud clamor coming from everywhere, particularly in financial markets that we are an outlier. Somehow the UK is doing much worse than everyone else. I think part of that was we had a much bigger shock than most people. It stayed. Energy prices were higher here because we depend a lot more on natural gas for electricity supply. And as a result of that, our energy price shock was bigger, longer.

54:15Dr Swati Dhingra:And that meant for a very long time, people were suffering. And also wages also increased much later than many other countries. So those were some of the things we faced. But it wasn't as much of an outlier on some of the points that we care about as policymakers, because what we were hearing was, oh, services inflation is really sticky in the UK. Inflation's been a lot stickier than in Europe. I actually wrote an article because I got so fed up of listening to that commentary. What was actually driving the divergence with Europe in particular, I don't think we should even bother comparing with the US.

54:49Dr Swati Dhingra:Look at the growth that's happening in the US. look at the fact that they are actually an energy exporter, not an importer. They're not a comparable country in this period. So Europe is a much more sensible compritor country or set of countries. And what we were seeing happen in Europe was, you know, a lot of the food inflation pressures that we were seeing here didn't apply in Europe as much because the consumption basket actually does look different from ours. There was also a fair number of regulated prices that were much higher. So, for example, what happens to when you go to the motor vehicles department, what is the price that you pay there?

55:27Dr Swati Dhingra:Or what happens to energy prices? These are things that are regulated prices that are not necessarily set in a marketplace. And those were much higher in the UK. And as a result of that, we were looking different in terms of services inflation as well. And services inflation is what most central bankers would look at because they think it's a much better read on what are domestically generated forces, as opposed to external factors that we don't. Because we're a service-based economy. Exactly. It's what we do. Yeah. And that's part of the reason. And also because that's not as contaminated by external forces.

55:59Dr Swati Dhingra:I would also differ a little bit on that. Restaurants use as much food and energy as another goods-based manufacturing company. So what was happening really was that some of those other prices were also diverging. And if you look at some of the more recent data and you look at where the UK is and you look at where Europe is, actually we don't look that different. Whether that be on wages, whether that be on services, excluding some of these strange commodities where things were going on. So in that sense, we aren't that much of an outlier. I think where we have been an outlier and even that now is up for some debate is productivity growth has been weak in the UK.

56:36Dr Swati Dhingra:And that's not something which has happened today. That's been true for at least since about the financial crisis time. It's maybe not as bad as we thought, but it's still been weak. It's growing because I thought we're getting more productive with all this AI and things like that. Are we like kind of stagnating or is it just growing very, very slowly? We're growing slowly at this point. And if you look at it, like it's like this and then away and we've just run a whole different trajectory of productivity growth. Yeah, so, you know, if you had sort of thought about where we were in, say, before the financial crisis had happened and gone on that trajectory where things would have been to where they are now, that's where we're looking very different.

57:14Dr Swati Dhingra:And this is the reason, you know, no matter which government comes in across the board, you always hear that we need to be investing in growth. And, you know, fundamentally, our investment record in general, whether that's private investment or public investment, has been muted compared to other countries. And that's a really big question. How do you get that going again? And how do you get that to translate into productivity growth? I don't have all the answers. I just think those are the questions that, you know, successive governments have asked and we haven't yet been able to solve that puzzle.

57:48Well, higher interest rates are not the way to encourage people to invest, right? Well, they would encourage you to save money, but you're talking from a business level to get them to put money into the UK. A higher interest rate might be you're trying to dissuade them from investing.

58:05Dr Swati Dhingra:I think on the margin, that's definitely true. You know, that's part of what we're trying to accomplish, which is that we want to contain inflation and we want to try and sort of dampen some of the growth to be able to keep prices in check. You know, but whether that's really necessarily dissuading every type of investment, I'm not convinced by that. For the reason that those hurdle rates for when you decide as a business, should I invest or should I not, typically tend to be much higher than what, say, the bank rate that the bank is setting. So there is some amount of, you know, cushion there, which in principle your bank can absorb or could pass on.

58:41Dr Swati Dhingra:And so it's not a one for one, but I think, of course, you know, to some degree, that's what interest rates do. Okay. You recently, typically you would vote, I could characterize you as someone who would vote for a reduction in the rate. You most recently voted to hold. What changed your mind? I had really hoped that at this point we would have been in a very normal economy, which means inflation back to 2%. We would have basically got interest rates down even lower than where we are now. Unfortunately, the Middle East crisis changed that. What we now expect is going to happen is that inflation might even cross 4%, depending on how big the shock is.

59:19Dr Swati Dhingra:And to some degree, the passage of time from when the war started in April to now has already meant that household electricity bills are going to go up. So that's something that, you know, again, we don't have direct control over, of course, energy prices, but we do have to worry about people have just seen a big inflation shock. They're now going to end up seeing one more. is that going to change behavior? Is that going to mean that businesses are going to think that they can pass on these prices as well? Those are the things we've got to worry about. My view is that at the moment, you know, we're in a very different position from where we were when the Ukraine war crisis happened.

59:58Dr Swati Dhingra:One, the Ukraine war crisis was severe. And I mean severe in the sense three times the peak of gas prices that we're seeing now. So, you know, that's a really big difference. The scale of the shock was massive then. That's not the case yet. And I really hope that won't be the case in the future either. The second point is that we were coming out of a pandemic at that point. So there were just things that we didn't understand about how the labor market was going to unfold because we'd never seen people in lockdown before. We didn't know how furloughing worked and how people might react to that.

1:00:31Dr Swati Dhingra:And the labor market was much tighter than compared to now where vacancies that businesses post to hire more workers is basically now at 10%, almost 10 % below where it was before the pandemic. So the economy is in a much weaker position, which means businesses, consumers, households, workers have much less capacity to get the price growth that they might want. You know, from the point of view of workers, you're not going to get as much wage increases if there's higher unemployment, which at this point there is, almost 5 % compared to about 3.5 % then. It also means businesses are going to think twice before they pass on prices, more price increases to consumers because price levels have already been higher, disposable incomes are already squeezed.

1:01:17Dr Swati Dhingra:Are people going to be able to take the pressure of one more cost of living crisis? I really hope we're not going to end up in that position, which is to say that this is not going to be a big durable energy price shock like the one we saw before. But we've got to think about that and how the economy might play up. Yeah, because I think one thing that isn't covered enough in the media is that the inflation rate is a compounding rate. It's 4 % growth on the previous growth. So, you know, all of that growth we've had is there and it's still here. And you're ratcheting it off again, aren't you? You know, the prices haven't come down.

1:01:53Dr Swati Dhingra:Exactly. So the prices have not come down. The levels have basically not necessarily gone into fall. They've stayed where they are. But one thing that has also happened is that people's wages have gone up to somehow cushion some of that increase, not fully, of course. To some degree, that has happened. But what you're seeing is that disposable incomes, which is, you know, once you've basically paid your taxes, paid your house, housing costs, what you're left with, that's been pretty stagnant. There's been very little growth there. So even with the wage growth, people aren't better off. No, so living standards have basically almost stagnated again.

1:02:32And this is coming off a period of really low wage growth post 2008 anyway. So it hasn't really compensated for the period, has it?

1:02:41Dr Swati Dhingra:No, not at all. In fact, if you look at sort of post financial crisis, it used to be that we would have a 2 % real wage growth. That was the norm, basically. Above the rate of inflation. Yes, 2 % above the rate of inflation. And what happened sort of afterwards was periods when that basically went down quite substantially. In fact, my colleagues at the LSE have enormous amounts of work on this. And what they would tell you would be that the UK fell from being at the top of the league tables, when you look at, say, some of the developed economies of the world, we were much better placed and we fell to basically the bottom of those tables.

1:03:24Dr Swati Dhingra:So we had a really severe problem after the crisis that we just did not see living standards grow the way we have done in the past. So something changed. And unfortunately, that exactly for the reasons you said, that compounds, you know, those levels don't move around. And if you're not getting more growth, you're not going to be able to recover those levels. So we basically ended up in this position of stasis. Are you, because, you know, it feels like we lurched from one issue to the next and that we never really recovered from any of those. We've had, they're very tight at this period. It's like we've been hammered.

1:04:00The cost of living crisis didn't end. It just carried on, it feels like. Are you optimistic that the UK can recover, prosper, you know, and get back to higher productivity, higher real wage growth?

1:04:14Dr Swati Dhingra:I voted with my feet so yes I think as in you live here as when I live here I've lived in the US before this in India of course is where I'm from and one of the reasons for wanting to live in the UK was the weather the inherent the glorious weather sorry it's a beautiful sunny day so today I actually can say that but the inherent strengths are there highly educated workforce. You know, we also have sort of product, yes, productivity growth has been weak, but there are, there is stuff that we make that would be the envy of the world, which is to say, we're a services superpower, second largest exporter of services in the world, just behind United States, so punching way above our weight.

1:05:02Dr Swati Dhingra:So there are these strengths, and I feel like those are going to be what we need to basically be able to capture and be able to build on i don't necessarily see tomorrow we can suddenly change immediately and become a manufacturing superpower that's not going to happen so i'm realistic about that but i think there are places where we can get productivity growth and where we if we invested correctly we would be able to see higher growth come back like social media the government should the government should empower creators because we've always punched above our weight in media wise and this this sector grows 25 year on year absolutely yeah 25 year already employs 40 000 people i think it 2.5 billion which is like the economic without you know we don't have a license fee and it's like the economic impact of the bbc already so you know and it's grassroots and bootstrapped so i think yeah there's there's lots of green shoots right we punch above our weight in a low ways we also speak english yeah Which is really quite useful, you know?

1:06:02And we're placed right in the middle because of how we structured the time zones. Just look at the map. It's all us. Yeah, but anyway, sorry, do you want to ask that?

1:06:09Dr Swati Dhingra:Those are enduring strengths that you can always build on. Yeah, yeah, yeah. No, but I mean, it's a very big advantage that the world speaks English, you know, and all these other things. Like you say, engineering and things like this, the things that are happening in Cambridge in terms of like AI and stuff, there's loads. and then just the beautiful people of the north, you know. And the culture that you bring with it. Yeah, yeah, yeah. You said in the past, just to finish off, you said in the past that economics should be demystified so, you know, normal people can follow it themselves. What's one thing about interest rates that we haven't discussed today that you think would be really valuable for the audience?

1:06:48Dr Swati Dhingra:I'd say two things. So one thing was, I think people need to realize that with the kinds of shocks that we're facing right now, for example, energy prices spiking globally or food prices spiking globally because we've got an El Nino coming, people need to realize that when we try and contain inflation, we're trying to basically reduce the impacts of cost of living crises, but it does come at a cost. And that's why these decisions are really important because they do create pain for people. So don't immediately go calling for interest rate hikes. Think about what we're doing. The second thing I want to talk about is I think people don't realize how important central banks are in their lives.

1:07:32Dr Swati Dhingra:Quite often, you know, they read the news story about interest rate hike or hold or cut, but they don't think about what are the other ways through which central banks matter as well. And we talked about quantitative easing or printing money, to put it in lay terms. Those are really large programs. And we put in a lot of scrutiny into what happens, you know, to industrial strategy, to other treasury decisions. We need to have the same amount of scrutiny of central banks as well. People like me need to be held to account. That's what makes the process actually fair and transparent. and I want and that's the reason for demystifying economics it's too important it's controlling your lives if you don't take charge of it nobody else will so please do hold us to account do you think you understand the process of deciding on interest rates and what that means better after that conversation oh yeah 100 100 but what I didn't realize is how hard that job is and how like encompassing it is that they're doing it every six weeks all year round just locked into like everything that's going on in the world that's going to affect the interest rates and all the different data and documents that they look at to come to this decision it's like yeah it's quite eye-opening the scrutiny and the criticism yeah um part of that conversation was how swotty's job and the job of the committee is a really broad measure of the economy and a really broad tool and and what i hope what i think she was trying to get across was it's going to impact people very differently in different ways one thing around that is your personal rate of inflation so we've left a calculator below from the ONS where you can input some of your personal details and it will spit out a rate of inflation so that you can get a more accurate sense of what's happening in your life because I think for a lot of people they probably see the headline rate and think my life feels a little bit more expensive than that so give that a go and it might inform you a little bit better This episode was sponsored by Take the Next Step, Invest People often think that investing is only done by professionals but it's something normal people can do and consistently investing can transform lives over the long term.

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