The Bank of England is facing the stagflation it has created

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by Shaun Richards

Today brings a collision between a couple of trends for the UK and finishes off a week full of data. It also brings a couple of my themes into play and in fact three as the Bank of England was kind enough to demonstrate late last night. They have had a really bad week and I mean that in terms of both policy and communications.

Communication let me down,
And I’m left here
Communication let me down,
And I’m left here, I’m left here again! ( Spandau Ballet )

Here are the details via the BBC.

The Bank of England’s new chief economist has warned that UK inflation is likely to hit or surpass 5% by early next year.

Huw Pill told the Financial Times that the Bank would have a “live” decision to make at its next interest rate-setting meeting on 4 November.

On what grounds?

Mr Pill, who succeeded the Bank of England’s former chief economist Andy Haldane last month, said he would “not be shocked” to see inflation reach 5% or above in the coming months.

He told the Financial Times: “That’s a very uncomfortable place for a central bank with an inflation target of 2% to be.”

Seeing as the Retail Prices Index will cruise a fair bit past 5% next month as the energy price rises and changes to VAT on hospitality kick in that is myopic even for the Bank of England. Of course he will be referring to the targeting CPI measure but it is poor of the media not to point out that the measure ignores areas where inflation is singing along with Nelly.

I said
It’s gettin’ hot in herre
(So hot)
So take off all your clothes

This bit from the Financial Times is in present circumstances extremely embarrassing and I am being polite here.

“I looked at this institution from the outside and was always pretty convinced it was in the price stability business, said Pill ” I’ve come inside and, as is the nature of entering institutions, you’re surprised by some things while others confirm what you’ve expected. One thing that is totally confirmed is that ( the BoE) is in the price stability business”

There are in fact two lies here. The first is that a 2% inflation target is price stability when it is not. We can start with a simple matter of maths here where stability is clearly 0%. The swerve they employ is to then say that it allows for relative price changes which ignores the fact that when we saw 0% inflation or so in 2015/16 there were large moves in the oil price otherwise known as a relative price change and one of the most important ones. This matters as the media have bought it as I heard Nina Warhurst on BBC Breakfast TV tell viewers that 2% inflation “allows businesses to plan”. What a load of rubbish.

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Next is that fact that the Bank of England has failed to do anything about an inflation rise which was on its way from the moment the er Bank of England pumped up the money supply. As it happens that has been made worse by the energy crisis but that too has partly been driven by the central banks. They have pushed economies to recover quickly and slapped themselves on the back for doing so. But they forgot that the monetary system can  respond very quickly and sometimes immediately but actual production needs organisation resources and planning and thereby takes time. Added to it was the effect of the pandemic on labour supply. Thus it has been the opposite of an organisation for price stability as it has pumped things up too much and now is playing a public relations game.

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This is a very important point because many push this line as it suits their agenda. Does monetary policy directly impact the energy market? No as an interest-rate rise or cut is very minor for it. But via its impact on the economy it does so indirectly and that mounts up when you have had the enormous stimulus policies we have seen. Central bankers want to take the credit for the growth and run away from the inflationary consequences. Remember when I kept pointing out that the broad money growth ( M4) would turn up in the inflation as well as the growth figures in around 18 months? Well that is now. On a lighter note it has led to some extraordinary moves by some telling others to turn their heating down or switch what they buy. That is one of the clearest signals that they got the inflation trend wrong.


Having ramped things up on terms of hinting at an interest-rate rise next month Hew Pill then switched horses.

Pill said: “Maybe there is a bit too much excitement in the focus on rates right now. ( The Guardian)

I will return to that issue in a moment but then he said something I agree with.

“The big picture is, I think, there are reasons that we don’t need the emergency settings of policy that we saw after the intensification of the pandemic. The settings [of monetary policy] that we now have are supportive settings. The need for support has diminished, as this [policy] bridge has been built and largely traversed.”

The problem for him is that the time for that move was early this year so it would be taking the edge off the inflationary surge that is happening now and also on its way. On an individual level that is not his fault as he has only recently been appointed but he did churn out a load of guff about the Bank of England and price stability which is on the evidence plainly not true.

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There is a lot going on here but today’s data has provided it’s own critique and something of a bitter pill for our Hew.

Retail sales volumes fell by 0.2% in September 2021, following an upwardly-revised 0.6% fall in August……Retail sales volumes have fallen each month since April 2021 when non-essential retailing re-opened and retail sales reached levels substantially above those before the pandemic. This is the longest period of consecutive monthly falls in the history of this series (which began in February 1996).

There are ameliorating factors here as some if this is because the economy has reopened and what was in retail sales has returned to hospitality for example. But it is true that there are more and more signs of  slow down and this is worldwide as the example below shows.

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2021 is 0.5 percent on October 19, down from 1.2 percent on October 15. ( Atlanta Fed)

It was 6.3% annualised at the peak.

On that road they would be thinking of cutting interest-rates and that has been their priority for some time. So whilst some may vote for an interest-rate rise I cannot see them getting a majority to do so. It remains my opinion that they believe talking about interest-rates is enough as we saw in 2014. After all if they really believed their rhetoric they would not have bought another £3.45 billion of UK bonds this week would they?

Cuts are a different matter as they are applied immediately.


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