The Governor of the Bank of England Mervyn King tells us that inflationary pressures will be under control by the middle of 2011!

After wondering recently about the sums of money spent on the UK football premiership I would just like to point out that Chelsea and Manchester United put on a magnificent show last night and even opened up the title race as the result turned into “A Bridge Too Far” for Manchester United. Earlier in the day we saw an event which did provide briefly some investment diversification. Talk of Saudi tanks heading to help the government in Bahrain had the effect of pushing up the price of oil whilst the US Dow Jones equity index fell by 168 points to 12,058. As the Libyan regime is also trying to rally against the rebel forces the price of a barrel of Brent crude is now above US $115, although the price for the same amount of West Texas Intermediate oil has failed to hold over US $100.  The talk particularly affected the Saudi stock exchange which fell by just under 7% yesterday and is down by a further 2.5% today.

As there is obvious unrest in Arabia it came as no great surprise to see the gold price close at an all-time high of US $1435 per ounce. Although some care is needed here because if you allow for inflation the surge in the early 1980s was higher in real terms. Silver is looking if anything even stronger as it heads towards US $34.50 per ounce. The theme is clearly one of uncertainty and inflation fears which is one of the reasons I was interested in what central bankers in the UK and US would say as they were interviewed by their respective legislators. The first group (UK) are open to the charge that they have let inflation into the UK system and the second represented by Ben Bernanke that their total purchases of around US $2.3 trillion of assets has contributed to a destabilisation of world markets and indirectly to higher commodity prices.

The Bank of England and the Treasury Select Committee

An extraordinary statement from Mervyn King (Governor of the Bank of England)

The projections that we published in the inflation report a couple of weeks ago have the characteristic that the inflationary pressures are pretty much back to target by around the middle of this year.

When this statement was uttered I hope that there were gasps around the room and I mean gasps of incredulity. Let me explain exactly what the Governor means. When the latest Inflation Report was issued I pointed out that there needed to be a heroic fall in inflation (of which so far there are only signs of exactly the reverse!) for the Bank of England’s forecast for 2012 to be even remotely realistic. This has been updated in “Bank speak” to the view that annualised inflation right now is approximately 7% and that this is a peak from which inflation will fall. Put in this way and applying the usual Bank of England view that inflation in the future will be lower than it is now then the view expressed by the Governor is that inflation will be on target in the third quarter of 2011  at 2%. And no this is the beginning of March and not the first of April in case you were wondering!

Returning from this statistical manipulation the Governor then gave his view on what would happen to the headline inflation numbers which are published each month. He felt that year-on-year comparisons meant that the headline inflation rate would remain high “until well into 2012”.


As this blog has developed I have found myself watching the Monetary Policy Committee use statistics in the way that a snake writhes in the grass as it twists and manipulates them. This has been necessary because the statistics it is judged by such as the inflation target have not been met with the current level of Consumer Price Inflation being 4% which is double the target. But in some ways just as bad has been the Bank of England’s appalling forecasting record in this area which for newer readers is highlighted by the fact that in February 2010’s Inflation Report we were told that inflation today would be around 1% and if you stare hard at their chart around actually means under! There have been many other examples of an inability to make even remotely realistic forecasts in the post credit crunch era. Even worse there has been a theme to this and the theme is to consistently expect lower inflation that what the outcome turns out to be. Any person should going forwards modify their forecasts accordingly to prevent systematic errors.

Having read the preceding paragraph please now re-read Governor King’s quote again. Yet again he forecasts an extraordinary fall in inflation! One day inflation will fall but one would hope for a better strategy from the Governor than in effect keep buying a lottery ticket for this event. The only indicator that is near to zero is his forecasting credibility! Worse than this is that policy is set on the basis of these forecasts and one can only conclude that it has been set as incorrectly as the original forecasts.

Written Evidence From Charlie Bean

Whilst the Governor gave oral evidence the written evidence came from Charlie Bean and my eyes were drawn to the following excerpts.

But I have become rather more concerned that the period of elevated inflation may persist for somewhat longer than I originally thought

A rather odd claim when you remember that inflation according to Bank of England forecasts is supposed to be 1% right now! We also get the usual Bank of England mantra which involves abuse of the definition of the word temporary.

I have concurred with the consensus on the Committee that the influence of the factors presently boosting inflation should prove temporary

I will spare you the sections which blames the current rise in inflation on everything except the Bank of England as it is rather long and frankly makes me wonder how he thinks he should do his job and why he thinks he is there. But in a contradictory section he admits by default to an error.

 In addition, the downward force from spare capacity appears to have been less than I originally judged

I will leave Charlie to explain in future speeches how he can simultaneously have made an error and yet be responsible for nothing!

The Bank of England view on the success of Quantitative Easing

Charlie Bean has been busy on the speech and report writing front as he found the time to tell an audience this.

A recent study for the United Kingdom carried out at the Bank found that the total impact on gilt yields was to lower them by an average of about 100 basis points. As some of the purchase announcements may have been anticipated, that should provide a lower
bound on their impact. Corporate bond yields also fell, with investment-grade bonds declining 70 basis points and non-investment grade bonds falling 150 basis points.

This sounds excellent and hurrah for the Bank of England! Plainly there is no moral hazard at all in Bank of England research declaring Bank of England policy to be a success! However reading on I spotted this.

And while the overall rate of nominal demand growth has been satisfactory, the split between inflation and activity has certainly not been everything we would wish, with our target measure of consumer price inflation reaching 4% in January.

So reality intervenes on the back slapping. However I raise this point because it refers directly to a theme I have been arguing for ever since I started this blog and that is that asset purchases or what is called QE was always likely to have a patchy result and was always likely to lead to a rise in inflation. I have a section on QE in this blog where such views were and are regularly represented but would like to point out again that the doppelgänger of QE called “overfunding” had exactly such patchy effects when it was tried some 20/30 years ago. Accordingly it was and is my view that the Bank of England either did not know this which leads to charges of incompetence or deliberately ignored it which leads to charges of misrepresentation….

The world’s most powerful central banker Ben Bernanke also speaks

In an accident of timing the Chairman of the US Federal Reserve Ben Bernanke was also speaking to legislators yesterday. His published report stretches to some 61 pages but I have decided to view it as he would.Accordingly we need refer to inflation briefly.

FOMC participants see inflation remaining low

But for future policy we need to look at unemployment and likely future unemployment carefully as this is now the deciding indicator for US monetary policy in Ben’s view.

the job market has improved only slowly. Following the loss of about 8-3/4 million jobs from early 2008 through 2009, private-sector employment expanded by only a little more than 1 million during 2010, a gain barely sufficient to accommodate the inflow of recent graduates and other entrants to the labor force…………..Even so, if the rate of economic growth remains moderate, as projected, it could be several years before the unemployment rate has returned to a more normal level. Indeed, FOMC participants generally see the unemployment rate still in the range of 7-1/2 to 8 percent at the end of 2012. Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established.


Some of this section is rather chilling as the admittal that the loss of nearly 9 million jobs in the credit crunch recession has been followed by the creation of only just over one million new jobs means that “net” just under 8 million jobs have been lost. Tucked away in there must be a criticism of the headline unemployment numbers if you think about it as how can they co-exist with such a loss of jobs overall? In my view,there is plenty of food for thought there.

For those wondering about what Ben Bernanke will vote for going forwards in terms of US monetary policy I see the phrase “Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established” as crucial. Accordingly I expect US monetary policy to remain extraordinarily accomodative until there is such an improvement in unemployment. I have seen recently talk that the current asset purchase programme where around US$75 billion of US Treasury Bonds are purchased each month in what has become called QE2 might be stopped early but frankly what is being set out here could more easily be seen as an advance justification of what would be called  QE3.

Just to reinforce the point I am saying what I think Ben’s report tells us about what he thinks and is likely to do not what I think. I am much more concerned about US inflation than he is.


8 thoughts on “The Governor of the Bank of England Mervyn King tells us that inflationary pressures will be under control by the middle of 2011!

  1. Re Bank of England inflation figures: Shaun, would I be correct in saying that any measures taken now would take in the region of 6 months to show any impact? If this is the case, then “back to normal” figures for Q3 of this year is ‘pie in the sky’ in my view. And if the price of oil continues at (even) its present level (i.e. without any further rises), then surely his view is seriously dubious. Is this a case, therefore, of telling us what he thinks we need to hear rather than what we want to hear?
    Thank you.

  2. The sheer incompetence of the UK’s and US’s central banks would be fascinating if the implications were not so serious; critical monetary policy is in the hands of a bunch of (largely) academics, conducting a grand experiment, and who are essentially answerable to know one. They’ve been so focused on trying to test their theories of avoiding a Japan-style lost decade that they’ve been unable to see the obvious, and far more dangerous consequences of their actions, transpiring right in front of their noses.

    Bruce Krasting posted some figures yesterday, following Bernanke’s comments, calculating that the Fed’s QE1, QE Lite and QE2 purchases has resulted to US rates being in-effect -4.5%.
    -4.5%! In such an environment the rational response is to hoard commodities, and that’s exactly the bet the markets have placed. And yet Bernanke sees no connection between Fed policy and those soaring world prices, having us believe those rises are solely as a result of organic demand growth, not speculative hoarding.

    With regards US unemployment, Bernanke’s policy is treating the current situation like a normal cyclical recovery, which simply requires “more juice” than normal, with seemingly no recognition of the structural change to the employment market which occurred from the late 90s onward. Those jobs have not gone because of a cyclical recession; they’ve been going, permanently, for a decade or more, to countries with lower cost bases. The boom of the US’s “FIRE” economy during the 2000s helped mask some of this structural change, but the credit crisis has exposed the reality. No amount of ultra-loose monetary policy will address this problem.

    John Hussman has written often about the impact of the Fed’s historically-unprecedented expansion the US monetary base (through QE), how unstable the situation presently is, and how slight changes in short term rates or monetary velocity could have very large inflationary impacts, if the Fed doesn’t respond with offsetting contractions of the monetary base:-
    (see ‘Pushing monetary policy to its unstable limits’)

    Bernanke would have us believe the US faces no longer term inflation risks, and that in any case, the Fed can reverse policy at the drop of a hat, should that threat materialise. But Bernanke’s public declaration of employment as his metric by which to throttle back on QE makes it extremely unlikely that they can/will respond in time to inflationary pressures, since to do so would require a total volte-face in policy and Paul Volcker-style resolve, with the result of knee-capping the asset prices that zero interest rates and QE have so far been intended to support.

    So I think there’s little to no chance of that sort of response or reversal. Instead, as Bruce Krasting writes, Bernanke remains Full Speed Ahead.

    And Bernanke’s misguided policies have clearly had a large influence on BoE policy, legitimising the introduction of emergency policies here, and providing cover for maintaining them for long after the initial crisis phase passed.

    Sadly, this is not going to end well at all.

  3. “The projections that we published in the inflation report a couple of weeks ago have the characteristic that the inflationary pressures are pretty much back to target by around the middle of this year.”

    I think he meant his REAL target rather than the official target. 😉

    Note the prices of gold and silver hit record (nominal) highs at around the time Bernanke was giving testimony. Does that say anything about how unconcerned the markets are about inflation?

  4. Living in the US and being low income, I am concerned about price inflation of grocery items.

    In my article …Seigniorage Fails Causing Banks To Fall Lower Commencing The Mother Of Market Of All Bear Markets …. I wrote that March 1, 2010 is a day that will live in financial infamy as it confirmed the that the seigniorage of the Milton Friedman Free To Choose Currency Regime, which was based upon Quantitative Easing and Quantitative Easing 2, failed on February 22, 2011, when the distressed securities taken in by the Federal Reserve under its TARP Facility traded lower, as is seen in the Fidelity mutual fund FAGIX trading lower.

    This resulted in world stocks, ACWI, turning lower.

    On March 1, 2011, seigniorage continued to fail, as is seen in FAGIX, continuing to fail, which induced the banks, KBE, to trade 2.1% lower and world stocks, ACWI, to trade 1.4% lower.

    We live in a bank centric and also an oil centric world. The world’s leading banker Ben Bernanke, in a semiannual report to Congress, told politicians that commodity price inflation, and oil prices more specifically, could pose a threat to economic growth and price stability if sustained at high levels, while at the same time reassuring markets and politicians that inflation remained low and expectations stable according to Forbes Blog.

    Leading the Banks lower were the institutions which rose in value the most during the last two years under Ben Bernanke’s expanding seigniorage. These included Fifth Third Bancorp, FITB, Huntington Bankshares, HBAN, Regional Financial, RF. Bank of America, BAC, Citigroup, C, Wells Fargo, WFC and Sun Trust Banks, STI.

    The contraction of seigniorage, that is moneyness, is the root cause of the failure of stock markets worldwide, VT, -1.7%.

    The contraction of seigniorage seen in the fall of the distressed securities mutual fund FAGIX means the beginning of the end of credit as it has traditionally been known.

    The world did not witness debt deflation on March 1, 2011, as much as it witnessed inflation destruction, which Urban Dictionary defines as the fall in investment value that accompanies derisking and deleveraging out of investments that were formerly inflated by money flows to, and carry trade investing in, high interest paying financial institutions, profitable natural resource companies, and high growth companies. Companies falling massively to inflation destruction included.

    Bruce Krasting reports “Senator Shelby asked Bernanke to explain how he came to the $600b QE2 program. The answer came at minute 32 of this C-SPAN clip. Ben explained that he felt that a monetary ease equivalent to a 75 BP reduction in the Fed Funds rate was in order to avoid deflation. He equated $150-200 billion of QE as being equivalent to a 25BP reduction in short term rates. The justification for QE all along has been that monetary policy is range bound by zero interest rates. QE brings us below “0” in equivalent policy.” The sum of QE 1, QE lite (the top off of QE1) and QE2 is $2.35 trillion. Using Bernanke’s formula you get a range of 4% to 5% as the approximate interest rate consequence of QE. (2.35/.15 or 2.35/.2) That is an extraordinary number. The Fed’ ZIRP policy set interest rates at zero. QE has brought that to -4.5% (average) based on Ben’s numbers.”

    The world is passing has passed through an inflection point: the world has passed from the Age of Leverage and into the Age of Deleveraging with the exhaustion of Quantitative Easing and with the failure of yen carry trade investing, as seen in the failure of the Optimized Carry ETN, ICI, on the very day that QE 2 was announced.

    The Age of Leverage was characterised by debt expansion, credit liquidity, stability, economic growth and expansion and prosperity … The Age of Deleveraging is characterised by inflation destruction, debt deflation, credit ill-liquidity, instability, economic contraction and austerity.

    One impact of the failure of seigniorage and inflation destruction, will be that in the age of deleveraging people will simply not have the financial where-with-all to buy homes. Renting, that is leasing of homes, will be a privilege extending by banks to a select group of individuals.

  5. ‘Renting, that is leasing of homes, will be a privilege extending by banks to a select group of individuals.’

    They have plenty on their books to rent out…….course they will have to evict before they can allocate………..

  6. Hi Shaun,

    Been following the blog for a while now and consider it pretty much essential reading to get an independent view.

    I have to admit that whilst I completely agree with you that the BoE should have made moves to normalised interest towards 2% late ’09 or early last year, I’m still in two minds about the near term inflation risks. Because of the inaction last year combined with the poor 4Q GDP I think the MPC are now ‘stuck’ with taking a wait and see attitude with rates at 0.5% rather than being able to adopt a much less stressful wait and see approach with rates at a more appropriate 2%.

    There are a three slightly contrary points on the inflation outlook I would be interested in your opinion on:

    – A key driver of continuing high inflation is from _across the board_ increases in commodity and food prices. This is strongly dependent on continuing high levels of BRICs growth and the West not slipping back into recession. There is real potential for a hard landing in the Chinese economy leading to a collapse in commodity prices (I’ve read 20%?) so therefore continuing prices and hence higher UK inflation is by no means a certainty.

    – In terms of an oil price spike without a domestic demand increase, since it has both inflationary and deflationary effects it would a mistake to assume the net effect will be strongly inflationary.

    – Oil prices especially are highly volatile, therefore a future sharp decline is also a distinct possibility and the outcome is not destined to be a sustained and inflationary rise?

    Finally a related question. What effect, if any, on UK inflation do you think ongoing Eurozone issues may have. Specifically any of the following
    – The forthcoming stress test identifying more Banking problems.
    – The Irish burning bondholders and/or senior creditors.
    – The situation with Portugal coming to a head with another attempted bailed out.
    – The emergence of a proper plan for a Greek default.

    Keep up the good work and many thanks.

    • Hi Mark
      Welcome to my blog and thanks for the compliment.

      As to your questions I have felt for some time that the UK has a building inflation problem which I have recorded on this blog since I started in November 2009. Since then the problem has built and persisted. More recently we have seen the commodity price boom and the oil price rise. Of these the way that the commodity price boom has persisted has been unusal as even strong trends ebb and flow but the ebbs have been very short-term. So as we stand there is little sign of a setback. What could set it back well loads of things of which an implosion in China is one or perhaps good crop yields this summer but as ever such events are unknown

      For oil I have a couple of thoughts. I do expect these level of prices if sustained to be fairly inflationary in the UK because if you look at input price inflation it has been high for some time now and so profit margins cannot take it for ever. As my brother is a driving instructor he is directly affected by the price rise and here is a deflationary effect as his petrol bill keeps rising.

      Will they be sustained? I expect the political problems to carry on for some time as such matters are always expected to end quickly but rarely do a bit like actual wars. This will keep the oil price under upwards pressure.

      however as a man who posts work with the title “expect the unexpected” i am aware that any of the commodity or oil price trends could turn tomorrow….

  7. Mervyn King has his own interest not raising interest rates and taking the economy into new low levels, but luckily other members in the MPC minutes understand that his intentions are to please the banks, and they are going to take a different stanad, which in my opinion should save Britain and bring it into the high levels that we’ve seen a few years ago before the financial crisis.

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