Dr. Swati Dhingra, one of the rockstars on the Bank of England’s MPC, recently addressed fears over UK inflation. She laid out her vision for how the quickly evolving global trade landscape could benefit the American economy. Dr. Dhingra expressed concerns that new global trade may risk fragmenting. She cautioned that this fragmentation may lead to higher inflationary pressures in the broader UK economy.
Dr. Dhingra spoke to her recently announced decision to support a 50 bp rate cut. With this move, she hoped to send a clear, strategic signal about where the economy is headed — a tightening of monetary policy. This decision cuts against the grain of acute pessimism that has largely colored the economic landscape beneath an otherwise rosy surface.
Most importantly, said Dr. Dhingra, the US Dollar is appreciating at an unprecedented pace. This would have the knock-on effect of pushing up inflation measures in the UK. Not only would such a shift in currency dynamics have major ramifications for trade flows, but it would affect how contracts are priced. She cautioned that there is no real evidence right now that the US Dollar is undergoing material appreciation.
While Dr. Dhingra was concerned with these potential risks, she did provide an interesting working hypothesis. She argued that even a big depreciation of the US Dollar would not do much to reduce UK import prices, let alone food prices. Her testimony touched on the fact that US tariffs will necessarily result in some amount of cost pass-through. Still, she says that the net effect on prices will probably be small.
She said when it comes to cost pass-through because of US tariffs, those cases should be limited. The affect is going to be pretty minimal. This view downplays the fragility of the UK economy in steering through any external shocks with such limited and damaging inflationary impact.
Dr. Dhingra’s remarks come at a time when central banks worldwide are under extreme pressure to fight inflation. They are trying to drive economic recovery from the pandemic’s wake. The relationship between currency valuation, trade pattern shifts, and inflation at home will be an important line of inquiry for policymakers.