accommodation, and rents as a yield to the supplier have been unusually low. hence, rents are bound to rise. interestingly, this shows the lengthy and rather complex connection between asset price changes and consumer price inflation. a key factor behind rental yields being very low was that the price of residential property rose so strongly – far faster than rents – in the earlier part of this decade, and has stayed high in most places in the country. while capital gains were occurring, it mattered little to many investors that rents as a running yield were low. but this was not sustainable. once capital gains slowed, the low rental yield mattered a great deal. low yields also prompted more demand for rental accommodation than otherwise. that combination was bound to lead to an adjustment in rents, unless property prices actually declined to restore the yield. since, in most locations, they did not, an adjustment something like the one we now see became very likely. it seems likely to continue for a while yet, until either rental yields regain more attractive levels or some other factor raises the effective return for investors. suppose, though, that we did take out some of the “ special factors ” that people nominate. let ’ s, for the sake of argument, remove from the cpi rents and petrol, as well as the calculation of deposits and loan facilities. if we do that, the rate of inflation of the remaining items over the year to december 2007 is 2. 1 per cent. no problem, right? well, not exactly. to assess the trend in inflation objectively, you cannot just take out items that rise in price, which is why we typically use underlying measures, which trim both extreme rises and falls. suppose for the current purpose, then, that we also remove fresh fruit, as a very volatile item and one that happens to have held down the cpi over the past year, due to the unwinding of the great banana episode of 2005 / 06. let ’ s also remove the effects of the child care rebate changes, treated as a price fall in the cpi, but which we know is a one - time effect and which reduced the cpi by 0. 2 per cent. if we do all that, we get a rate of inflation of 3. 0 per cent over the year to december 2007. a little elementary figuring and a look at the quarterly profile, moreover, will tell you that, when this calculation is done for the year to march 2008, the answer is likely to be higher again. this is

andrew g haldane : risk off paper by mr andrew g haldane, executive director, financial stability, of the bank of england, 18 august 2011. * * * the views are not necessarily those of the bank of england or the financial policy committee. i would like to thank aashish pattani, ben broadbent, srishti chhabra, david gregory, priya kothari, james mcbride, lewis webber and nicola worrow for comments and contributions. four years on from the start of the great recession, the world economy is cloaked in uncertainty. the story so far is well understood. over - extension of private sector balance sheets – in particular among banks – sowed the seeds of the crisis. those private sector risks have since been socialised, either directly through support for the financial sector or indirectly through lower aggregate output in the economy at large. that socialisation has caused balance sheet risk to migrate from the private to the public sectors. today, these public sector balance sheets strains are most visible in europe where a number of countries remain under the sovereign searchlight. but outside europe, two of the world ’ s three largest economies – the united states and japan – have been the subject of ratings action. and sovereign cds spreads among advanced countries are at their highest - ever levels. four years on from the start of the great depression, the world economy was also cloaked in uncertainty. in his inaugural address in 1933, newly - elected president roosevelt famously captured the mood of the moment : “ the only thing we have to fear is fear itself ”. that fear factor is once again pervasive today. but do we have nothing to fear? and what role might policy – in particular macro - prudential policy – play in allaying those fears? emerging from the great recession the path out of recession is invariably a bumpy one. this time ’ s great recession is unlikely to be an exception. chart 1 compares the recent path of uk gdp with that following previous gdp dips : the great depression of the 1930s and the uk recession of the early 1990s. to date, gdp has steered a middle path, somewhat stronger than in the 1930s but weaker than in the early 1990s recovery. if past recessionary experience is any guide, the uk ’ s gdp trajectory might be expected to pick up pace from here. most external forecasts remain broadly consistent with that view. but the risks around this path are considerable, as recent indicators of slowing global activity at