These are difficult times for central bankers. In their own terms they are being forced to dismantle what they consider to be one of the pillars of their work. This is the way that house prices will be forced lower by the rises in mortgage rates which accompany their increases in official interest-rates. That is why they had to be dragged kicking and screaming to the interest-rate increase button. That has been symbolised overnight by the US ten-year yield passing 4%.
Next up comes their outright failure at their primary role which is to control inflation. Although he did not mean to Bank of England Governor Andrew Bailey highlighted this only yesterday in a speech at the Cost of Living conference in London.
The latest release of data for the UK consumer price index showed an annual increase of 10.1% in January. It is down from a peak of 11.1% in October, not least because direct effects from energy prices have eased.
As you can see he is trying to pass the blame on but the fundamental point is that inflation has been more than 5 times its target. Even worse than that the Bank of England Governor summoned up all his technocratic expertise to assure people of this.
Our view is that the price pressures will be transient – demand will shift back from goods to services, global supply chains are likely to repair themselves, and many commodity prices have demonstrated mean reverting tendencies over time. ( 27th September 2021)
Indeed he was continuing with a policy to raise inflation.
This begs a pertinent question: what impact do you get from continuing purchases in market financial conditions, and particularly at a time when inflation is rising as it is?
because we regard the current upturn in inflation as transient,
As it happens he was piling up future losses on the Bank of England QE bond portfolio. But in terms of his inflation control role he completely failed.
If we look at yesterday’s speech much of it was about trying to shift the blame from his own failures. We have already noted the energy issue and there was more.
The purple bars on this chart show that a big part of the rise in consumer price inflation has been caused directly by energy prices.
His chart has two problems however. Firstly it shows inflation surging before the energy price rise ( when as I pointed out above he was assuring us it would be “transient””.Also that the peak contribution to inflation was 4% which leaves another 7% at that time to explain.
He then has quite a cheek because he like so many central bankers decided to focus on what they call core inflation. He still does as it was in his second sentence yesterday.
But also, core inflation, which excludes the most volatile components of the consumer price index, fell more than expected to 5.8% in January.
But then he tries to pivot onto food prices which are not in core inflation.
As you can see on this chart, food prices were nearly 17% higher in January 2023 than in January 2022. This is an unprecedented rate of food price inflation, adding nearly 2 percentage points to overall inflation.
He again slides in his scapegoat.
The story is similar for another essential in life: food. Before the war, Russia and Ukraine supplied significant shares of the global consumption of a number of agricultural products such as sunflower oil, wheat and barley. With disruptions to those supplies, prices increased sharply over 2022
The problem with this is his own Chart 1 which shows inflation rising to 6% and looking on course for 7% and more ( the line is pretty vertical) before the war in Ukraine. This was the case when he was assuring everyone that inflation would be “transient” whereas of course it is still here.
For newer readers the whole core inflation issue is simple. Firstly it ignores what the ordinary person would consider to be vital and core. Secondly central banker claims that it provides a guide to future inflation were completely wrong.
Oh and for good measure he threw in another couple of excuses although quite how an event 7 years ago caused this when in the meantime inflation was effectively 0% for a while is ignored.
The UK economy has been hit by a series of significant economic shocks. These include the change in our trading relationship with the European Union, the Covid pandemic with associated bottlenecks in global supply chains,
Claims to have acted forcefully
If you have dithered and delayed then the central banking handbook suggests you present yourself as being forceful. Here is the Governor Bailey version of this.
These concerns bring home that, by increasing Bank Rate by close to 4 percentage points, we have tightened monetary policy significantly. It is having an impact.
You may note the reference to 4% is quite some distance in the speech from the reference to inflation passing 11% as that would rather puncture his hot-air balloon.
Even by the low standards here some of the speech was breathtaking.
Even if home ownership feels remote for many younger people, they worry that rents could rise as landlords look to pass through higher mortgage rates.
As the Bank of England has spent the last decade trying to make home ownership even more “remote” via ever higher house prices that is quite a cheek. Indeed Governor Bailey has really pumped up house prices in his term with an interest-rate as low as 0.1% and around £200 billion via the Term Funding Scheme. The excuse they used then was that affordability was strong, how is that going?
This means that about 1 in 10 households will see their mortgages go up this year. If new mortgage rates rise by 3 percentage points, as market rates currently suggest, the ‘typical’ monthly interest payment will go up by just under £250.
I doubt they will be mentioning affirdability for a while. Also at a time when rents are in fact soaring it is more than even tone deaf to speak of them like he has. The official measure due to its lags of nearly a year and a half has failed to pick anything up but in the real world rents, especially in London have risen strongly.
You might think Governor Bailey has quite a cheek talking at a cost of living conference and you would be right. Not only did he look away from fast rising inflation he told people to restrict pay rises.
Workers should “think and reflect” before asking for pay rises, £575,000-a-year Bank of England chief Andrew Bailey told MPs on Monday. ( The I 17/05/22)
Yesterday is part of a public relations exercise with the speech designed to distract as much as possible from the reality of his actions. From its own inflation survey released this morning then his view of the future is not going so well.
-UK firms expect to raise prices by 5.4% over next year -UK firms expect inflation to be 5.9% in 1 year, 3.4% in 3 ( @DailyfxTeam )
So people expect inflation to still be over target in 3 years time.
As to prospects for interest-rates the Governor acted like the apocryphal two-handed economist.
At this stage, I would caution against suggesting either that we are done with increasing Bank Rate, or that we will inevitably need to do more. Some further increase in Bank Rate may turn out to be appropriate, but nothing is decided.
That just sounded confused. Indeed as he also suggested that the suggestion of a pause was in play.
My reading of the evidence since our February meeting – the data we have had for economic activity, the labour market, and inflation – is that the economy is evolving much as we expected it to. Inflation has been slightly weaker, and activity and wages slightly stronger, though I would emphasise ‘slightly’ in both cases.
There was one further extraordinary element for what was in many ways a simple speech as it covers areas he must look at time and time again. Although does he? As he seems to need a lot of help.
I am grateful to James Bell, Ben Broadbent, Fabrizio Cadamagnani, Swati Dhingra, Jonathan Haskel, Andrew Hauser, Andrew Hebden, Andrew Hicks, Karen Jude, Zaar Khan, Elizabeth Levett, Catherine Mann, Katie Martin, Huw Pill, Andrea Rosen, Martin Seneca, Fergal Shortall, Silvana Tenreyro and Laura Wallis for helpful comments and assistance in helping me to prepare for these remarks.
“My reading of the evidence since our February meeting – the data we have had for economic activity, the labour market, and inflation – is that the economy is evolving much as we expected it to. Inflation has been slightly weaker, and activity and wages slightly stronger, though I would emphasise ‘slightly’ in both cases.”
Is a 19% wage rise “slighlty higher” than the BOE should worry about when they meet to decide interest rates later this month?
“Pret A Manger will give staff their third pay rise in 12 months, following other firms in boosting wages during a labour shortage.
The coffee chain said the rise, to begin in April, amounts to a 19% bump in year-on-year pay for shop staff.”
I forecast a rise of 0.25% to 0.5% when they meet this month which is “slightly higher” than I was forecasting 12 months ago !
You cannot trust anyone these days including Issabel Oakshot who has betrayed a number of individuals the last decade or so according to the BBC, but she says she hasn’t done it for money !
Imagine a journalist betraying a politician???
If only there were more like her.
Hancock has the blood of tens of thousands on his hands, & really should be swinging from a tree.
So should Tony Blair and many other politicians over the years.
Hancock should have had more sense however allowing Issabel Oakshot all his messages as it isn’t the first time she has betrayed a legal agreement
Does anyone remember Daisy McAndrew? Allegedly betrayed her former employer Charles Kenedy by revealing his alcoholism when working as a reporter for ITV news which ultimately led to his resignation as Liberal leader, she is now a presenter for TalkTV.
“UK economy slightly stronger than expected”
re:£200 billion via the Term Funding Scheme.
enough on its own to buils 667,000 three bed houses at the top rate
enough to build 44 GW of nukes ( thats 389TWh pa for a demand of 300TWh )
possible enough to buy a jet or two for that aircraft carrier …..;-)
It seems the TPTB can pony up cash when they want to.
Indeed, it’s only starving, (& I mean seriously malnourished, not just rumbling tummy) British children that are beyond them.
None of the CBs (BOE/FED etc) ever mention the fact they printed loads of money in the plandemic. Then they wonder why they have rampant inflation a few years down the line.
they’re hoping no one will notice 😉
which is a good bet considering MSM capture ….
@Jan, I’ve been making that the basis of why we need higher interest rates now. but it’s not only that; the Energy Price Guarantee scheme is, to all intents & purposes, printy-printy to somewhat alleviate the impact of that plandemic largesse.
To paraphrase Bailey, “If we take out the things going up most, inflation is lower!”
Sans blague, Hercule.
I am afraid that is an international game.
“AMSTERDAM, March 2 (Reuters) – The Netherlands will change the way it measures energy prices paid by consumers in order to improve estimates of inflation in the euro zone’s fifth-largest economy, its statistics agency (CBS) said on Thursday.
The agency said in November it was looking at a problem with its energy price measurements, which it said had caused the country – and possibly others in Europe – to overstate inflation.”
Whenever I am in an official meeting now and they say to meet “international standards”I hear they are at it again….
I see California, home of the Social Justice Warrior & Eco-nutter, has just broken further records for cold & snowfall & New York is getting more than its fair share.
With cold & snow touted for UK next week, snow in MOROCCO damaging crops, the compensation is that Faithful have STFU, apart from seriously dyed-in-the-wool extremist idiots like Benfield.
Well, if it is too late to save the planet, why keep trying?
the planet is fine …… the people are ****!
* possibly because of the hoi oligoi
I like that, & may steal it.
Great article. Absolutely reprehensible performance. The BoE is rotten to its core and Bailey has simply been promoted from one disaster to another to get him out of the way. And here he finally is – wreaking the utmost damage it is possible for him to achieve.