This is a particularly interesting phase for the Bank of England and you can translate that as difficult if you wish. It faces persistent inflation in the UK above a level seen by our peers with points at (another) policy favour. Also we have seen this week the potential start of an example most of it would love to follow and that is Japan as it looks set on more policy easing. One way of looking at that has been the fall in the Japanese Yen to 153.10 versus the US Dollar. As I have pointed out many times over the years Bank of England Governors have it in their DNA to talk the currency down. So a UK Pound £ at 204 Yen which I welcome they will dislike.
We can begin our analysis via a piece in the Financial Times from policymaker Megan Greene who seems unaware that at best it is tin eared to write behind a paywall when you are paid from the public purse. However Megan has discovered something that I argued all along.
We now know that the inflation that often follows can be persistent rather than transitory.
Of course this rather skips the issue of why they instead told everyone that it would be transitory and that because of their technocratic expertise we should believe them. Followed by a situation where they could not have been more wrong.
In the face of recent supply shocks, inflation peaked at 9.1 per cent in the US, 11.1 per cent in the UK and 10.6 per cent in the Eurozone. More than five years after the onset of the pandemic, it remains above target in the US and UK.
At this point we see that central bankers have zero self-awareness as most will be wondering why should we listen to people with such an awful track record? Also if you read the paragraph below they/she are learning things they should know or rather are re-writing history.
The past few years have taught us a lot about the nature and transmission of supply shocks. First, different supply shocks can propagate through the economy in different ways. Recent research by Bank of England staff suggests a fall in productivity growth and a wage mark-up both result in a sharp initial jump in core inflation, but a negative labour supply shock results in a much more persistent rise.
Caution is needed as I welcome introspection and thought but this is just looking backwards rather than forwards. Perhaps she ishoping that peoplehave forgotten how many times the Bank of England and the other central banks assured people that inflation expectations were anchored? They carried this on even when inflation was raging.
The extent to which supply shocks have a lasting impact depends in part on whether second-round effects take hold, which act mainly through inflation expectations.
The issue is why they claim this is new research when I was arguing it all along?
The level of inflation influences how expectations form. Bank research shows households’ and companies’ attentiveness to inflation is greater when it reaches 3-4 per cent in the UK.
It is kind of Megan Greene to make me look good. But anyone who has followed the debate will be wondering why the central bankers did not know this?
In projecting their own price growth over the next year, companies are more influenced by inflation changes when inflation is high than when it is lower, as it was before the pandemic.
Or to be more accurate claim they did not know. It must be in past Bank of England research. The theme of claiming that this is new when I argued it all along continues.
The state of the economy matters when gauging whether elevated inflation expectations will feed into higher wages and prices. We saw this after the pandemic, when the inflationary impact of energy price and supply chain shocks was perpetuated by a tight labour market, boosting wage growth and services inflation.
Plus there is an issue with this below as regular readers will be aware I am involved with Better Statistics and have been in contact with them this week over more problems with the Office for National Statistics. For those interested it has produced a blog on problems with the pyblic finance numbers. But Better Statistics are rather unhappy with the Decision Maker Panel structure so I would advise ignoring it rather than this below.
According to the bank’s Decision Makers Panel, many companies also set prices according to the state of the economy rather than on a schedule, and they changed their prices more frequently when inflation was high in 2022.
We also get a rather devastating critique of the November 2021 interest-rate rise of a mere 0.15%.
Bank research finds that if policymakers are uncertain about the persistence of inflation — as they are likely to be in the case of a supply shock — policy should respond more forcefully to inflation than under conditions of certainty.
This sort of thing happens time and time again when they ignore what is happening die to their technocratic expertise and then later claim to have “discovered” it.
Catherine Mann
Catherine showed herself to be the Bank of England “loose cannon on the decks” earlier this year as the woman who had previously called for a rise in UK interest-rate to 5.5% and presumably higher did this in February.. From here on February 11th.
Along the way, I will discuss the disaggregated data that underpin my assessment of current and prospective economic and financial conditions which led me to vote for an ‘activist’ 50 basis point cut,
She has been speaking at the Resolution Foundation this morning and here is there summary.
Key point from Catherine Mann: inflation uncertainty is leading to weak demand. Policy prescription: bring inflation down by keeping rates higher for longer. Risk is that if something else is going on, higher rates make weak demand worse.
Perhaps she could vote for a 0.5% rise and a 0.5% cut at the same meeting…
Nobody seems to have told her that the official Labour Force Survey has collapsed.
BoE’s Mann: I Keep A Close Eye On The Labor Market – Moderate Change In Unemployment, Vacancies.
Plus there is something else that is rather revealing.
The household saving ratio is a particular area where I feel we have been making key judgement calls as part of the monetary policy decision-making process.
Her speech is based on this as it has obvious implications for consumption which is the main part of her speech. How is official data for savings and the savings ratio working out? From Monday.
The ONS has just halved its estimate of UK household savings. Q4-2022’s saving ratio was cut from ~9% to just above 5%, one of the largest revisions in 30 years. It means the supposed “wodge of cash” households built during Covid never really existed, we were not saving more, ( ‘@AscendedYield)
Along the way we have yet another problem for the Office for National Statistics. But from the point of view of the Bank of England yet again they are relying on a series that is less reliable than tea leaves. After all tea leaves might occasionally be right.
This is the problem with modern central bankers they produce all sorts of supposed highbrow research that is based on foundations that at best are built on sand and sometimes worse.
Comment
There is an undercut today in that I am looking at two policymakers who voted for unchanged interest-rates at the last meeting so they deserve credit for that.. But as we look ahead it matters why they did so as well as otherwise things will go wrong again and as you can see above they are in many cases lost at sea.
How do these people get appointed? There is a subplot here as the UK establishment seems to be anti British women and to prefer American ones. It goes across political parties as an adjunct of the Conservative party called “Tory Treasury” attacked me and claimed Minouche Shafik was British. They went rather quiet when I quoted one of her speeches and asked them if they could tell her that?
Plus her is a suggestion to improve things. Why do they never discuss the money supply? Surely it is not the wrong sort of measure….
