Yesterday the latest Bank of England Inflation Report told us that they now expect inflation to stay above target “for a while”. A “while” seems to mean until the second half of 2013.
In february of this year the Bank told us “Inflation should continue to fall sharply at the start of 2012…..inflation is likely to decline further thereafter….inflation is judged somewhat more likely to be below the target than above it for a good part of the forecast period”.
That’s quite a change of forecast, from optimism to pessimism. It follows, of course, the hard facts that inflation stayed higher for longer, and is rising again now. The Bank clearly thinks it could rise further this winter as the energy price rises kick in.
The Bank is also forecasting now that output “may shrink” in the fourth quarter of 2012, after the third quarter spurt in growth thanks to Olympic ticket sales and the as always unmentioned increase in public spending. Does the Bank not read the GDP figures and see public spending made the largest increase to the Quarter 3 growth figures or is there some conspiracy to suppress the truth about this? How did the Bank miss the further fall in output in Quarter 2?
In February the Bank was forecasting an increase in output this year, with an acceleration of growth thereafter. It is another big change in forecast this autumn.
The Bank confesses to being puzzled b y the continued improvements in the labour market with a million new jobs since 2010, and the poor performance of productivity. Why can’t the Bank appreciate that the sharp declines in output in financial services and banking, and in oil and gas, have of course hit productivity, as these are highly productive areas, with substantial value added per employee. The growth is occurring in more labour intensive areas of activity, with the obvious results on jobs and productivity.
It is worrying that the Bank so struggles to understand the modern UK economy. Its doctrine of unused capacity preventing inflation has shown strains, and the Bank has not yet found a new way of analysing and understanding the reality. Wages and prices in the traded private sector are under substantial competitive pressures to keep them down. There has been some relief from the devaluation, where manufacturers have often taken the benefit on margins rather than pushing for higher export volumes. Public sector fees, charges and regulatory interventions in areas like energy are pushing prices up.
As the Bank say, “We face a rather unappealing combination of a subdued recovery, with inflation above target for a while.” That is what you get from bank nationalisation, a failure to sort out damaged banks and stressed provincial property markets, from a tax based strategy for cutting the deficit and from quantitative easing.