This article is taken from the July 2023 issue of The Critic. To get the full magazine why not subscribe? Right now we’re offering five issues for just £10.
Two years ago the Bank of England had just published its May 2021 Monetary Policy Report. It was signed by every member of the Bank’s Monetary Policy Committee and was the Committee’s most substantial and authoritative view of inflation over the medium term.
From the date of the Report’s publication, it envisaged a brief phase of strong growth and “modestly” above-target inflation but thereafter, “growth and inflation fall back, with inflation around the target [of 2 per cent] two and three years ahead”.
In the MPC’s judgement, the delivery of on-target inflation would coincide with steady growth of national output and occur with little change in interest rates. According to a table in its May 2021 Report, the Bank rate would be 0.3 per cent and 0.6 per cent in the second quarters of 2023 and 2024 respectively.
The benign prognosis did not mean that the Monetary Policy Committee was altogether unworried. Indeed, the MPC’s concern was that inflation-reducing spare capacity might not be eliminated soon enough. It feared that “the balance between demand and supply” in the British economy was such that policy would not be tightened until underlying inflation had risen “sustainably” to the 2 per cent figure. In other words, the MPC was more concerned that inflation would undershoot target than that it would overshoot.
Readers may chuckle. In the seven months to February 2022 the average monthly increase in the annual rate of consumer price inflation was a startling 0.6 per cent. The result was that in the year to February 2022 the consumer price index went up by 6.2 per cent, more than three times the official target. Russia then invaded Ukraine in late February 2022, with adverse impacts on world energy and food prices. Whatever its other problems, the Bank of England could of course not have foreseen that.
Anyhow a big jump in consumer prices in April 2022 took the annual rate to 9.0 per cent. The peak came in October with a number of 11.1 per cent, more than five times the target.
The Bank of England has sought to avoid blame for double-digit inflation
The Bank of England has sought to avoid blame for double-digit inflation by attributing it, above all, to international shocks over which it has no control. But certain key facts cannot be overlooked. Global energy prices are lower today than they were just ahead of the Ukraine invasion, while — to repeat — even in February 2022 consumer inflation was more than three times target.
Further, why has the Bank radically changed its stance on interest rates if malignant global forces are the source of the trouble and it cannot control them? Bank rate in the second quarter of 2023 has been not 0.3 per cent, but on average nearer 4.5 per cent.
Inflation may have started to come down, but it is still four times target and interest rates are 15 times the level expected by the MPC in May 2021.
What has gone wrong? Has the Bank of England lost the plot? Its officials were given fair warning. In the Telegraph on 26 March 2020 I expressed alarm about central banks’ “printing of new money”.
I conjectured that, “over the medium term (say from 18 months or so forward) the resulting accelerations in money growth will cause significant or even major increases in inflation”.
A few weeks later in commentary for the Institute of International Monetary Research at the University of Buckingham I was more specific. I said that — in the UK as elsewhere — double-digit annual increases in money might well be followed by double-digit annual increases in consumer prices.
In a major speech on 25 April this year, Ben Broadbent, the Bank’s deputy governor and an MPC member, asked whether the quantity of money or interest rates gave a better guide to the behaviour of inflation.
But this was really a cloak for an attempt to refute the monetarist argument that the cause of the current inflation episode is to be sought in the undoubtedly very high money growth of 2020 and early 2021. The speech traversed much ground, contained almost 10,500 words and offered 17 charts. And the conclusion?
After a confession of uncertainty about the right way to assess households’ behaviour, Broadbent’s last sentence went, “As with just about every other economic indicator, changes in money holdings need some interpretation and their significance is not always 100 per cent obvious or inevitable”. Wow.
As Broadbent acknowledges, one of his most revered teachers at Cambridge was Frank Hahn. That fits. Hahn organised — with Robert Neild — the letter to The Times from 364 British academic economists which protested against the 1981 Budget.
That Budget raised taxes in a recession, partly to help in meeting the targets for lower money growth in the Thatcher government’s medium-term financial strategy. The letter to The Times said that “the time has come to reject monetarist policies and consider urgently which alternative offers the best hope”.
The MPC does need to improve its forecasting performance, but I am not suggesting that Yogi Berra be appointed
to it. Nevertheless, it’s like déjà vu all over again.
