Even in ordinary times it is wise to take note of the words of central bankers. At the moment that is even more true because we never seem to be in ordinary tines and especially because central bankers are in play in terms of tightening monetary policy. Yesterday the Governor of the Bank of England spoke to the British Chamber of Commerce and he opened with praise for it.
We all benefit from data and surveys of course – including the informative recruitment and economic surveys conducted by the BCC. But conversations with people running businesses and organisations give us the stories behind the economic data, helping us to connect with what’s happening on the ground in the UK economy.
The problem with this is that he failed to “connect” with the UK economy when inflation was on the rise preferring to utter the “Transitory” mantra. You do not need to take my word for it as even its house journal is on the case.
The Bank of England is holding a “Festival of Mistakes(opens a new window)” this week, celebrating lessons learnt from financial disasters of the distant past. Some would argue that they, and their counterparts at other central banks, should focus on more recent errors. ( Financial Times).
In fact the FT really rather puts the boot in.
Advanced economies are experiencing the most acute — and most enduring — outbreak of inflation for a generation. Yet almost all rate-setters failed to spot the degree to which price pressures would ratchet up — and stick around, despite record amounts of monetary and fiscal stimulus.
That will teach the Bank of England to drop its economics editor to nearly last in the list of questions at its last press conference. But, returning to monetary policy Governor Bailey has quite a cheek claiming to take note of what is happening on the ground in the UK economy after just demonstrating exactly the reverse.
Actually his speech had the seeds for another failure. Maybe he read my summary of the labour market as this.
As Covid hit, UK labour supply growth came to an abrupt halt. The size of the workforce declined by more than 130,000 people, or nearly ½%, from the three months to December 2019 to the three months to January this year.
Did not have a good time in the latest release.
In the most recent data – including this week’s labour market data from the Office for National Statistics (ONS) – there are some signs that this shock too is reversing somewhat, especially among younger people.
You need not take my word for it let me hand you over to the Resolution Foundation.
Rising employment and falling economic inactivity drove a big expansion in the workforce in early 2023 – putting aside fears that it had been permanently shrunk by the pandemic………but with two-thirds of the total fall during Covid now reversed.
This is important for two themes here. I have pointed out already the failure on inflation well now we have one building on employment. Yet again they have preferred their economic models to what businesses must have been telling them and yet again it is going wrong. Next up is the issue of excuses of which the speech has plenty.
Denial Alert
I use the Yes Minister ( Jim Hacker ) phrase below regularly on social media.
Never believe anything until it is officially denied
Whilst I expected it to be frequently true I have been surprised to learn that it is rarely wrong. In that spirit I present these words from Governor Bailey.
Now, I’d like to push back strongly against one argument you sometimes hear, which is that inflation is high because monetary policy was too loose in the past.
Apart from a rewriting of monetary theory it comes with a heavy dollop of scaremongering.
The headline is that, even if we had had the benefit of full hindsight in the run-up to the war in Ukraine, and ample advanced warning – which for the record we did not, no one did – then in order to keep inflation at around 2%, we would have had to raise Bank Rate well into double digits, sending unemployment much higher than it is today, and we would have had to do so in the middle of the worst pandemic in more than a century.
So it is in fact a triumph he has let inflation soar whilst sitting on his hands? In fact we already had a serious problem before the war in Ukraine.
The Consumer Prices Index (CPI) rose by 6.2% in the 12 months to February 2022, up from 5.5% in January.
It was on course for 7% anyway which is a dose of reality for the excuses from the Bank of England. Also the nonsense about “double digits” completely ignores the argument that raising interest-rates early means you are likely to have to raise them less rather than more.
There is no other way of describing this than it being the economics equivalent of a false flag operation. It is a feature of the times that central banks try to present themselves as judge and jury on their own actions which puts the moral hazard meter off the scale. This time around they cannot even take the Financial Times with them.
The failure to spot inflation has not only left central bankers risking financial instability by having to raise rates far faster than usual but threatened the credibility of institutions that rely on trust to steer the economy towards sustainable growth.
I am afraid that in the circumstances – they declared that persistent inflation would be Transitory- the claim below from Governor Bailey is simply appalling. The emphasis is mine.
So even as headline inflation is coming down, the MPC pays particular attention to indicators of inflation persistence, including labour market tightness and wage growth, and services price inflation.
Comment
Those listening to the speech must have felt like they were in some sort of parallel universe. In the real world the Bank of England and other central banks thought that this time would be different and they could implicitly monetise government borrowing without they reason why it is a bad idea ( inflation) occurring. In such a world this is now extraordinary.
On my visit to the South West yesterday, I went to Citizens Advice in Exeter to meet people who are helping those at the sharp end of the rise in the cost of living. It is clear that many people face difficult choices and have had to cut back even on essentials.
God only knows what they made of it.
Within the speech was a confession of failure and confirms the point that I made earlier about timing.
These changes in interest rates are still working their way through the economy. While we have seen higher rates quoted on new mortgages, and while the effective rates on new mortgage lending have been increasing, the effective rate on the whole stock of mortgages is still in a process of adjusting towards higher reference rates. This reflects the increasing share of fixed-rate mortgages in the UK mortgage market.
It is and was well understood that it is better for central banks to act early and as you can see changes to the mortgage market have made that more important. Whereas he and his fellow policymakers ignored that.
The economic world the Governor is inhabiting was described by Earth Wind and Fire.
Every man has a place, in his heart there’s a spaceAnd the world can’t erase his fantasiesTake a ride in the sky, on our ship, FantasyAll your dreams will come true, right away
For the people he visited at the Citizen’s Advice Bureau his dreams are a nightmare.