The case is being brought by residents from Greene County, who say their homes were damaged when water leaked from defective polybutylene plumbing made by the two companies. A third manufacturer, DuPont has alreadyagreed to an out- of-court settlement, according to lawyers for the plaintiffs.. Asda, the supermarket group, confirmed yesterday that it had dropped Warburg Securities as joint broker, calling in James Capel to work alongside Cazenove Warburg also acts for Sainsbury, Asda’ rival. Archie Norman, Asda’s chief executive, was understood to have become concerned about possible conflicts of interest. Warburg has suffered a bout of client departures in recent months, including Glaxo Wellcome and Emap.
Asda is expected to bounce back into the black when it announces full-year results later this month. Forecasts range from pounds 210m to pounds 245m compared with last year’s post-exceptional loss of pounds 125m.. The Government now has only one formal macro-economic objective – an inflation target. It is therefore unfortunate that, after several months of consideration inside the Treasury, last Wednesday’s announcement of the new inflation guideline for the next Parliament left unnecessary room for debate and ambiguity. Although I think I know what the new target means, this was not assisted by the confused manner in which it was unveiled to the world, and many in the financial markets seemed hazy about how to interpret the target at the end of last week. The authorised version of the new guideline was that contained in the Chancellor’s Mansion House speech last Wednesday. For the current Parliament, the existing target has had two components – a range for underlying inflation of 1-4 per cent, and a subsidiary commitment to get inflation into the bottom half of that range (below 2.5 per cent) by the spring of 1997.
The main change announced last week was to flip these two objectives around. The new target is “to continue to achieve underlying inflation of 2.5 per cent or less”. Provided that interest rates are set consistently at the level judged necessary to achieve this inflation target, the Chancellor believes this, in practice, “should ensure that inflation will remain in the range of 1-4 per cent”.
This formulation in itself requires a little interpretation, about which more later. But the potential for confusion was enhanced by two other developments last Wednesday.
First, in what was presumably just a slip, albeit a careless one, the Treasury put out some written briefing on the new target which said that the 1-4 per cent band would be achieved “most of the time”. This is actually just a statement of the obvious, except that it differed from the official version stated by the Chancellor, a difference which enabled the Opposition to claim that the Treasury did not appear fully committed to its own target. In the City, those disposed to see slippage and relaxation relative to the original policy objective (and that is a large band) were given needless encouragement.Second, in his own Mansion House speech, the Governor of the Bank of England seemed to paint a slightly different gloss on the inflation target by simply referring to the 2.5 per cent limit, adding in very specific terms that the Bank expected its policy advice to be judged relative to that target. There was no mention of the 1-4 per cent band, thus inviting the comment that the Governor’s interpretation of the target was tougher than the Chancellor’s.I am sure these minor glitches will soon be forgotten, but it is important for all participants to sing off precisely the same song sheet in future. Otherwise – and this is a consistent theme of this column’s recent observations of the Chancellor’s behaviour – some of the advantages of a transparent and simple policy framework will be lost.Now back to the more important question of what the authorised version of the target really means. The key point is that policy will be set so that the expected value of inflation in two years will be permanently below 2.5 per cent. This, of course, does not mean that the inflation rate will never be above 2.5 per cent; in order to be certain of achieving an absolute ceiling of 2.5 per cent, the Treasury would have to aim for inflation at zero or less, so that any possible shock would still leave the out-turn below 2.5 per cent.
Thus, if the Treasury aims for something just below 2.5 per cent (say 2.25 per cent) as the expected out-turn, the actual inflation rate will sometimes be above the central target and sometimes below it.Note, however, that the 1-4 per cent band is not symmetrical around the central objective for inflation, which is “below 2.5 per cent”, and therefore below the midpoint of the 1-4 per cent range. Assuming that the target objective is in fact 2.25 per cent, there is much more headroom above the target rate than there is below it. The Treasury presumably decided to accept this asymmetry as a small price to pay for the continuity of keeping the same band in place as before. Furthermore, it could be argued that, at very low rates of inflation, shocks are likely to be asymmetric in an upward direction, since it is increasingly difficult to push the aggregate inflation rate downwards as it approaches zero.The consequence of formulating the target in this way is that any shock to the price level is fully accommodated by the authorities, who simply reset their future target for the inflation rate back to 2.25 per cent after any shock has taken place. (In fact, the price level under this new regime will follow the path of a random walk with an annual upward drift of 2.5 per cent.) This practice has the disadvantage that, over any period of years, there will still be enormous uncertainty over the expected level of prices at the end of the period.This problem could have been eliminated by expressing the target in terms of a stable price level rather than a constant inflation rate. But the consequence of this would be that if the price level rises unexpectedly in any period, the authorities would have to set policy so that the price level actually falls in a subsequent period.