Why The Bank Of England Thinks Everything is Just Fine
… in one simple graph, which I’ve aped from an excellent post by Nick Rowe and Stephen Gordon.
UK Log of CPI Level vs Target
This shows the Bank of England’s performance in keeping CPI-CT growth close to a 2% trend growth path since the CPI target was adopted in 2004. The BoE has done even “better” on this metric than the Bank of Canada; there is not even the vaguest hint of a negative demand shock evident in this chart. The 2008 recession? It didn’t happen. 2011-12 recession? Nope. It’s not there.
And fiscal austerity? Are you kidding me? Even if you use the CPI-CT index as I have here, which ignores the VAT (and other indirect tax) changes, it’s not there. And even if you allow for “base drift” as the BoE did in 2008 due to the commodity price shock, the CPI level is still stuck well above a new 2% trend line starting in Summer 2008.
This is a graph of, if anything, an economy where demand growth is outstripping potential supply. Right?
Well, maybe not. Here’s “Why The Bank of England is Totally Wrong About Everything Being Just Fine”, in another simple chart, again aping Nick/Stephen’s graph:
UK Nominal GDP vs Trend
So good… and then so awful. Who can possibly believe that the UK has deficient aggregate demand and also think that inflation targeting is a really good idea?
What an informatively depressing post. I hope the BoE gets the message about a Canadian being tapped to head it.
Lorenzo, I’d hope that too, but given that the MPC maintained their tight money policy in the MPC meeting this week, I fear it has gone over their heads rather.
Brit
Maybe that´s why Mike Carney came up with NGDPT in his December 11 speech. Canada´s “need” for NGDPLT is not as pressing!
http://thefaintofheart.wordpress.com/2012/12/12/ngdp-lt-a-target-for-all-seasons/
I live in hope, Marcus! It is hard to believe Carney will have taken the job without checking the UK data very carefully first, isn’t it?