The MPC is careless about inflation

I have been puzzling over the May 2009 Bank of England “Inflation Report”. It contains three charts. Chart 2 shows the forecast inflation rate if interest rates reflect market expectations, and Chart 3 shows what happens if interest rates stay at today’s current low level. The text tells us, as we would expect, inflation will be higher on the second forecast.

Try studying the graphs. It is like one of those Spot the difference picture competitions. I have puzzled and puzzled, but think they must have put the same chart in for both headings, as it looks the same to me.

It seems to confirm that the MPC and Bank are not as focused on inflation as they should be – or that they have too many staff tripping over each other with the publication, so no-one ends up proof reading it. Chart 1 is of course the forecast of GDP, implying that they are more concerned to target output these days.

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18 Comments

  1. Colin D.
    Posted June 1, 2009 at 6:55 am | Permalink

    Correct me if I am wrong, but I thought the MPC had a single, specific rationale – to control inflation. As such, they should be apolitical in their actions. It seems they are now considering matters which more properly belong to the Chancellor. So much for the much vaunted ‘independence’ !

  2. Mark M
    Posted June 1, 2009 at 7:24 am | Permalink

    Careless about it? Oh, John.

    Brown intends to inflate his debt away, and he’s made sure to tell Mervyn.

  3. oldrightie
    Posted June 1, 2009 at 8:20 am | Permalink

    They are waiting for a Conservative Government. Part of Brown’s scorched earth policy. According to the dreadful and inadequate PM, that will be the very last day he can wait to be thrown out.

  4. Demetrius
    Posted June 1, 2009 at 8:56 am | Permalink

    The Bank should obtain a magic feather from The Firebird and wave it about to secure influence over the figures.

  5. THE ESSEX BOYS
    Posted June 1, 2009 at 9:02 am | Permalink

    Alistair Darling, deservedly, is under the microscope again this morning so we have someting to add on the expenses issue if we may.

    One of the most balanced articles we’ve read on MPs Expenses was written for the Telegraph on Friday by Brian Friedman, a retired senior tax partner with Ernst & Young.

    Some of the sensible points he made include:

    1. In commerce, if a company pays for a capital asset, then it remains the property of the employer.

    2. The taxman doesn’t accept voluntary donations: the tax system doesn’t work like that. If we try to pay tax where none is due, he will simply return our cheque.
    We believe this may have been the case with Hazel Blears who had either submitted an incorrect tax return, in which case she is liable for interest and probably penalties, or the whole thing is a charade.

    3. From a tax perspective, any expenses incorrectly claimed and subsequently repaid represent a beneficial loan. If the total is over £5,000, the MPs should be subject to tax on notional interest arising – so the taxman should be charging interest and penalties on all those incorrect tax returns.

    4. If the declaration any of us make when we complete a tax return is shown to be inaccurate, HMRC, in practice, gives us a last chance to come clean with a full accountant’s report on anything more to be declared accompanied by a ‘Certificate of Full Disclosure’.
    If all MPs now had to review their returns and sign such a certificate it would certainly focus their minds.
    If they don’t or won’t, why should we trust them with our votes?

    5. If any MP has not declared as a benefit in kind the sum received for accountancy advice he/she will have submitted an incorrect return – see 4 above.

    6. If Mr Darling cannot submit a tax return without specialist help he has himself and his predecessor to blame for the system’s greatly increased complexity during their treasury tenure. Now is the time for a radical simplification.

    7. Special section 292 of the tax code that MPs created for themselves – which ensures lower levels of scrutiny by exempting their ‘ overnight’ expenses – should be abolished without delay. The most important need is to stop the rot and (we add this ourselves) not to be sidetracked by longer-term issues such as constitutional reform.

    8. All expense claims should be suspended with immediate effect until a Certificate of Full Disclosure is submitted to the Fees Office.
    This is the simplest way of separating the rotten eggs from those who have behaved properly.

    Our own final comment on Mr Friedman’s article is that systems already exist within the tax code to help resolve the present main concerns.
    We businessmen generally try to fix immediate problems without delay. We simultaneously start considering longer term solutions and plans.
    Not for the first time do we note the government’s inability to adopt the same balanced approach thereby delaying the application of the tourniquet so clearly needed right now.

  6. Alan
    Posted June 1, 2009 at 9:06 am | Permalink

    “they have too many staff tripping over each other with the publication, so no-one ends up proof reading it”

    Or maybe too few staff so that they could not afford the time to check it properly.

    Or, more likely still, somebody goofed. It does happen in all organisations run by humans, you know. It’s a mistake to read too much into it.

    • Eric
      Posted June 2, 2009 at 12:25 pm | Permalink

      Let he who is without sin cast the first stone.

      This is a great blog, John – but you obviously do not get it proof read accurately.
      Much as I enjoy your highly intelligent comments, with which I generally agree wholeheartedly, some or your articles are slightly let down by the surprising number of typos which could usually be expected to be corrected if such proof reading was undertaken more thoroughly.
      It is somewhat ironic that several distinguished parliamentary careers of many years standing are currently being tainted by what appears to be simple carelessness over small matters which have far reaching effects despite often being so petty in themselves.
      Pedantry is not particularly attractive, I know, but it could be wiser in these ultra critical times.
      Thanks for the significant contributions you are continuing to make in your blog.
      I remain a great admirer of your undoubted intellect.

      reply: I do not always have enough time to proof read sufficiently. Apologies for poor typing.

  7. Lola
    Posted June 1, 2009 at 9:30 am | Permalink

    If one supports the von Mises view that inflation is the destruction of the value and quality of money, usually by its overproduction by governments, and that price rises are the consequence of inflation, not its cause, then we have already had mega inflation from 2000 to 2008 and the current technique of ‘quantative easing’ will only make things worse.

    All this excess money will have to be destroyed if we want to put the UK back on a sound financial footing.

    Of course you could go all the way with Von Mises and privatise money and let markets decide its price. Clearly it’s much too serious a subject to be left in the care of New Labour (or in fact most socialists, with a few very noble exceptions). Are you, the Tories, going to be responsible with it? Or will you get tempted to inflate too?

    • james harries
      Posted June 1, 2009 at 10:56 pm | Permalink

      Excellent! I’m a fan of vM too.
      But he gave too much credit to governments. In fact, govt has not been in control of the money supply since at least the thirteenth century (invention of the letter of credit) or maybe the fourteenth (invention of the cheque).
      This sounds bad, since govt routinely tries to control the money supply (Alan Waters, Mrs T, etc.)
      But a moment’s reflection (by you, vM, or JR) would show that’s IT’S A JOLLY GOOD THING!
      Would you like to rely on money handled by New Labour, or any other politician? Even bankers are preferable, at least they have individual depositors to whom they are answerable 24/7.
      Incidentally, here’s a poser for you (in line with JR’s confusion over the BoE figures):
      The BoE publishes estimates of money growth (M0, M1…) monthly. Their data goes back many years. Looking, with the benefit of hindsight but without the benefit of dates, could you put even a year to the historical figures? Or even get a rough idea of economic cycles from it?

  8. Derek Chambers
    Posted June 1, 2009 at 11:19 am | Permalink

    There is a note on the Bank of England website under “Numerical Parameters for Inflation Report Probability Distributions for CPI Inflation and GDP Growth” which says “**CORRECTION: The probabilities in the tables for CPI inflation based on market rates (lines 11 and 12 in the spreadsheet) and constant interest rates (lines 35 and 36) were incorrect. They have been amended.**”

  9. Mike Stallard
    Posted June 1, 2009 at 11:21 am | Permalink

    Before writing a comment, I had a big think.

    Yes, I did look up the relevant document and it is massive. I couldn’t find the relevant charts. It seemed to be 2.5 MB. I do not want to read it. Why should I?
    So I cannot write anything sensible except to say that I take all government figures with a huge pinch of salt anyway.
    But you already knew that.

    On the way to the gym was “Start the Week” saying that there is a huge gulf between the Internet and Newspapers. Journalists are paid to hang about. They know people personally. They read long, boring documents. They wait around airports for hours talking to people and waiting for the celeb.
    We bloggers do not do that. Why should we? I, for one, have a fascinating Polish Locomotive to construct out of cardboard.

    Where we are very strong indeed is that we are not seduced and bullied by the whips, by our boss, by promotion, by the need to make a lorra lorra money fast…..
    So our conscience is as pure as Mr Brown’s Presbyterian upbringing.
    Where we are very weak is that, for the most part, we do not understand the details and, let’s be honest, we rely on our prejudices often far too much.

    Why I love this blog is because it explains what is going on completely fairly and very clearly to the punters.
    And, unlike the Daily Telegraph, it is free to us – but not to you, our host!
    Thank you.

  10. Javelin
    Posted June 1, 2009 at 1:36 pm | Permalink

    The worry for me over the next 20 years will be inflation imported from the BRIC countries. China or India are as big again as the US+EU together.

    When you see these countries start to produce the “peoples-car” or hear about the Idaho potato farmer who can’t compete with China for wood to package his crop – then you know there is going to be a long term inflation of resource prices.

    Imported inflation has not gone away it’s just died down in the recession. It will be back.

    EU+US jobs will be lost to cheaper labour from the BRIC, taxes will weigh our competition down against BRIC countries and imported resource inflation will eat away at our standard of living.

    • Mike Stallard
      Posted June 2, 2009 at 8:15 am | Permalink

      But how can you deal with this? I have been thinking along the same lines for some time now.
      Isn’t it a bit like slavery? The people who own the slaves get seriously rich. The slaves, of course, do not even own their own bodies. In between the slave owner and the slave, the freeman tries to compete economically with the slave. He just cannot do so. What does he do? He sells his own body and that of his children into slavery to survive.
      I reckon, therefore, that either the BRIC countries will have to get richer or, in our host’s words, spend more and consume more, or else we effete Westerners will have to get a lot more self denying.
      I cannot see signs of either happening at the moment.

  11. Robert George
    Posted June 1, 2009 at 2:40 pm | Permalink

    Nothing surprises from the BOE these days.

    As an aside, a dire result is forecast for Labour and Gordon Brown if he calls an election either in June or in the autumn. However, if Brown somehow presses on until next year the inflation and unemployment which I expect to see ravaging Britain by then could destroy Labour permanently.

    Severe price inflation has to hit hard in the 3rd and 4th quarters of 2009, a nasty combination with high unemployment.

  12. Denis Cooper
    Posted June 1, 2009 at 2:50 pm | Permalink

    The charts are very similar but not identical, as becomes clearer if you go to page 8:

    http://www.bankofengland.co.uk/publications/inflationreport/ir09may.pdf

    and reduce it down to 75% size so both charts are visible at the same time.

    I suppose this means that the markets expect base rate to remain low, not much higher than 0.5%, for the next couple of years?

  13. ManicBeancounter
    Posted June 1, 2009 at 6:42 pm | Permalink

    The revealing factor is the amount of variability in the forecasts. We are quite literally in uncharted territory. Past history on which forecasts are based is largely irrelevent, as the economy plumbs uncharted depths. Reliable predictions are impossible. So even the forecast range of -0.5% to +3.5% for two years time is not reliable. And with more quantitative easing on the way, and with The Prime Minister trying to hang on into next year, it the upside we should worry about.

  14. Adrian Peirson
    Posted June 1, 2009 at 7:23 pm | Permalink

    Are these intelligent Premonitions or are they based on what ‘they’ the Elites have decided will happen by manipulating the money supply etc.

  15. Sally Copperwaite
    Posted June 3, 2009 at 7:57 pm | Permalink

    I fear there is a complete misunderstanding of what ‘inflation’ actually is at the Bank of England. To quote Milton Friedman again ‘inflation is always and everywhere a monetary phenomenon’. According to Austrian economists, inflation is (even more specifically) the expansion of the money supply. Inflation will exist as soon as the money supply is increased. For most lay people, it is enough to realise that a rapidly expanding money supply (as allowed here by the B of E and the MPC over the last eight years) will inevitably lead to asset bubbles, as exemplified by the housing and equity market bubbles of the last five years. What is really worrying is that no-one at the Bank of England seems to understand this.
    If anything is designed to increase the money supply, the programme of Quantitative Easing that they are undertaking is it. Yet, this is what they say about the inflationary impact of Q.E. in one of the opening paragraphs of the May Inflation report: ‘CPI inflation is likely to drop below the 2% target later this year. Under the assumptions that Bank Rate moves in line with market rates and the stock of purchased assets financed by the issuance of central bank reserves reaches £125 billion, it is more likely than not that CPI inflation will be below the 2% inflation target in the medium term.’ This is utter rubbish. Everything the Bof E is doing is designed to increase inflation by increasing the money supply. Inflation as measured by CPI might drop below 2% if demand in the economy contracts substantially, but the money supply will still have increased dramatically. This means that all of our money is worth less. This will be particularly obvious when we go on holiday to the Eurozone, Australia or the Far East, or when we import goods from those areas. That is where the inflation currently being engineered by the B of E will be felt first. Eventually, that inflation will filter into the domestic economy. When the Conservatives eventually take over, a lot of overpaid people at the Bank of England must be culled, starting of course with Mervyn King!

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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