This morning is one of those where the research student who is presenting the morning meeting thinks that the Christmas party has arrived already and the Governor has authorised the release of the best wines from its cellar to add to the celebrations. First there was this.
The British Retail Consortium, a trade body representing major high-street retailers, said total sales in November were 5.0% higher than a year earlier, the biggest annual increase since July and up from an increase of 1.3% in October. ( Reuters)
Then there was also this.
Separate credit and debit card data from payments provider Barclaycard showed consumer spending – which includes things such as eating out and travel, as well as shopping – was 16.0% higher than in November 2019, before the pandemic.
If we feed that into yesterday’s analysis it provides more confirmation that the UK had regained the previous peak in terms of economic output. Although there was a catch in that some of this was no doubt due to people trying to neat any supply shortages by buying early. Also the sectors which will be impacted by the new restrictions were already left behind.
Travel remains depressed, with spending on plane tickets 22.1% below its level two years ago. Restaurant spending was 4.3% down compared with November 2019, compared with an 8.3% shortfall in October, Barclaycard data showed.
But the overall theme was positive and it was followed by yet more confirmation that the UK house price boom goes on.
UK house prices rose again in November, with the value of the average property increasing by another 1%, or £2,808,
tipping the annual rate of inflation up to 8.2%. This is the fifth straight month that average house prices have risen, with typical values up by almost £13,000 since June, and more than £20,000 since this time last year. ( Halifax )
This takes me back in time because for all the talk of unconventional monetary policy if we look back in time the areas which respond to the Bank of England are retail sales and house prices. The change since the pandemic began is extraordinary though.
“On a rolling quarterly basis the uptick in house prices was 3.4%, the strongest gain since the end of 2006, bringing the new average property price up to a record high of £272,992. Since the onset of the pandemic in March 2020, and the UK first entering lockdown, house prices have risen by £33,816, which equates to £1,691 per month.” ( Halifax)
So Governor Andrew Bailey will be considering himself to be a wise and benevolent Governor at this point.
The Absent-Minded Professor Speaks
Deputy Governor Benjamin Broadbent gave a speech in Leeds yesterday and he had something on his mind.
’m coming here at an extraordinary time for the economy in general and for monetary policy in particular.
Annual CPI inflation rose to over 4% in October, with the jump in domestic energy bills the single most
important contributor to the change on the month. The aggregate rate of inflation is likely to rise further over
the next few months and the chances are that it will comfortably exceed 5% when the Ofgem cap on retail
energy prices is next adjusted, in April.
This is a complete fail for the absent-minded professor and his colleagues and let me illustrate that with this from them.
CPI inflation is projected to remain notably below the MPC’s 2% target throughout this year
and much of 2021, partly reflecting the impact of lower utility bills. ( January 2021 )
As you can see they got the overall situation wrong and got the specific issue of energy prices wrong too. The latter is not auspicious for their entry into the green debate is it? This matters as somewhat ironically Ben himself explains.
One is that it takes time for policy to work. A change in interest rates has its peak impact on inflation only
after a significant delay – probably eighteen months or more.
So to deal with the present inflationary episode they would have had to look ahead which as you can see they got very wrong. They should be cut some slack due to the fact that things were uncertain but they were completely wrong and frankly clueless.
We see the traditional deflections deployed of which the first is cherry-picking.
One implication is that, fully to offset the
inflation we’ve seen through the course of this year, monetary authorities would have to have foreseen the
various things that have pushed it up (including, for example, the recent problems with gas supplies)
This completely ignores the point I have made since the pandemic began which is that the surge in money supply growth would lead to inflation which it has. It has to turn up somewhere and they have already managed to get house prices out of the inflation numbers will it be energy prices next?
The next deflection is to make the alternative look dreadful.
Another is that they would have to have tightened policy pretty aggressively – by enough to push up
unemployment materially, with the explicit aim of depressing nominal wage growth – just ahead of or during
the first wave of the pandemic. Using the Bank’s economic model, and assuming perfect foresight of the rise
in tradable goods prices, a simulation suggests you would have needed comfortably more than an extra 2%
points on the rate of unemployment – something around eight hundred thousand jobs – to have kept overall
CPI inflation at 2% in the fourth quarter of this year.
As you can see it does look dreadful and it was as intended picked up by the media. So far the obvious flaws have been ignored. For example using a model that has got 2021 completely wrong “Using the Bank’s economic model,” as it has also way undershot the economic growth seen. Also the output gap style approach ignores the fact that it has not worked for at least a decade now.
Rather curiously the absent-minded professor then goes onto suggest that his job is rather pointless.
At a fundamental level this is because monetary policy cannot, over the long run, offset real economic shocks.
Then he suggests that he is in fact not interested in inflation targeting at all.
In these “exceptional circumstances” the MPC’s remit requires explicitly that Committee balance these considerations and, if necessary, that it set policy with a view to taking somewhat longer to return inflation to target.
That is because so far he and his colleagues have done nothing at all to bring inflation back to target! In fact this very afternoon they will be doing the reverse with yet more easing as they buy another £1.15 billion of UK government bonds.
As usual Ben was wrong.
As yet it’s clear that hasn’t happened to the degree that I, at least, expected.
But he expects us to believe him for next time.
However, I still think it’s more likely than not – looking a couple of years ahead as we should – that these
pressures on traded goods prices are more likely to subside than intensify.
Also when he voted for rate cuts and a surge in QE back in March 2020 he was not looking 2 years ahead he was looking at that week and that day. As I point out regularly this particular set of goal posts is on wheels so it can be moved easily and may even be motorised these days.
What Ben Broadbent has done with his speech is confirm how right I was that the Yes Minister 4 stage plan would be deployed. I went though it specifically on the 5th of March and let is remind ourselves.
In stage one we say that nothing is going to happen
This is illustrated by the Bank of England Report from January telling is that inflation would be below target this year.
Stage two, we say something may be about to happen, but we should do nothing about it.
That was when it had to admit some inflation was coming but look at the consequences for unemployment! To quote the line of logic exhibited in the speech yesterday.
Then we have the cherry-picking about energy prices.
In stage three, we say that maybe we should do something about it, but there’s nothing we *can* do.
Then finally as illustrated by the sudden talk about lags.
Stage four, we say maybe there was something we could have done, but it’s too late now.