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Shameless Hypocrisy and UK Monetary Policy
Dr. Martin Weale is concerned about market sector Unit Labour Costs. OK. Here is what happened to market sector Unit Labour Costs going in to Summer 2011:
Market Sector Unit Labour Costs. Source: ONS Sectional Productivity Bulletin
They have just tipped out of outright deflation. To be fair, this is current data; possibly the Bank had data saying something different back in 2011. But let’s presume that if Dr. Martin Weale was looking at even vaguely similar data, he must have been arguing for looser monetary policy at the time? Here’s what he was saying in June 2011:
I have, of course, been pleasantly surprised that wage settlements in the private sector have remained low and that private sector regular weekly earnings are rising by less than 2 1⁄2 per cent per annum.
(Yes, Dr. Weale! Like you, people all round the country are celebrating their low pay rises! Hooray for low pay rises, they say! Hooray, hooray! He continues…)
But a more general picture of unit domestic costs excluding taxes can be obtained by looking at the gross value added deflator. This rose by 1 per cent in the first quarter of the year and by 2.4 per cent compared with the first quarter of 2010. So it is consistent with the view that, even after excluding import costs and taxes, there are at present substantial cost pressures in the economy.
Can you see what he’s done there? He did not mention unit labour costs! In 2011, the GVA deflator was a good reason to… well, what did Dr. Martin Weale want to do in 2011? Just check the title of the spech: “Why the Bank Rate should increase now“.
Coming back to 2012, Unit Labour Costs have been rising, and what is happening to the GVA deflator? It rose just 1.2% in the four quarters to 2012 Q4 and has been below 2% for most of the last four years. So is that a “substantial” level of cost pressure, Dr. Weale, or a “pathetically weak” level of cost pressure? What would you say? Or do you in fact cherry-pick the statistics which fit your narrative and ignore the rest?
[Update: I meant to note that the GVA deflator reading which Weale mentioned, of 2.4% over the four quarters to 2011Q1, has since been revised down to 1.0%.]
I am honestly disgusted by this. This is not policy. This is not how the UK’s most powerful technocrats should behave, lurching from arbitrary decision to arbitrary decision. We deserve much, much better than this. Re-appointing the hawks to the MPC is looking like a catastrophically bad decision, absent a tighter (less discretionary) policy mandate to keep them on a tight leash.
Martin Weale is Here To Help
… get inflation down. He presents the graph of nominal wages. I’ll put the figure here for the annual rate of change in average weekly earnings, looking at private sector regular pay:
0.7% in the year to March 2013
Weale decides instead that private sector unit labour costs are a clear and present threat to the sacred inflation target, and concludes:
So my own judgement is that a further easing of the rate of growth of cost pressures is necessary before I feel we are in danger of undershooting the inflation target.
Do you like that? “easing of the rate of growth of cost pressures”? Nominal wages are rising, let’s say it again ZERO POINT SEVEN PERCENT, and Weale wants to see an “easing of the rate of growth of cost pressures” before he’d consider easing monetary policy.
Regime Change Rumour Mill: Osborne rejects NGDP Target
George Parker and Chris Giles report that Osborne’s economic adviser Rupert Harrison has failed to find enlightenment:
During his tour of Boston, New York and Washington, Mr Harrison is understood to have ruled out the radical option of changing the BoE’s remit to include a growth target based on nominal GDP – cash spending in the economy.
…
[The Treasury is] considering whether the existing 2 per cent inflation target gives sufficient flexibility or whether the Treasury could tell the Bank to target that rate over a longer horizon to help growth.
Game over? It looks that way. “Sufficient flexibility“? Give me a break. The cult of the central banker lives on, our chosen experts carefully seeking the right path to nominal salvation. In other FT news:
King speaks out to halt sterling’s fall
BoE governor says currency is now ‘properly valued’
Good luck, everybody. Blogging will be light for a while.
Martin Weale: “I Will Crucify Mankind Upon a Cross of 2 Percent Inflation”
With thanks to Matthew Yglesias for that one. MPC member Martin Weale is interviewed by the Daily Mail:
‘It is certainly not self-evident to me in the light of the apparent stickiness of inflation that substantial extra support for the economy would be compatible with the inflation target,’ he explains. ‘I am concerned about the stickiness of inflation.’
…
He adds: ‘The persistent worry we have is that if people get used to the idea of high inflation, if they take the view that the Bank of England isn’t bothered about the inflation target, it can lead to increased inflation risks and can affect the way in which people negotiate wages and set prices.’
…
Weale also warns that Britain could suffer an unprecedented ‘triple-dip’ – meaning the economy slides back into recession later this year after the briefest of revivals.
‘I certainly would not say there is no risk of that happening,’ he says. ‘What we have learned over the last four or five years is the capacity of the economy to surprise in ways people might not have thought possible.’
So. We’ve had a “double-dip”, we might even have a “triple-dip”, and it is not “self-evident” to Martin Weale that the economy needs more “support”. Because all that matters is price stability!
Does the Bank of England Like Inflation? No, no, no.
As a 54-year-old, Mr Fisher jokes he is old enough to recall when inflation was a far bigger problem — hitting 25 PER CENT in the Seventies.“What people have experienced over the last year or so shows why inflation is such a bad thing — and why the bank’s Monetary Policy Committee was set up with dedicated powers to keep it closer to target.”
Their emphasis. Inflation is “such a bad thing”! Get the message?
OK, it is more than likely the Sun have mangled Mr Fisher’s original words beyond recognition. So over to MPC member Paul Tucker, speaking to Euroweek:
A provision in our mandate that we have used actively is that we aim to achieve 2% inflation in the medium term, but if inflation gets pushed away from target by, say, oil price movements, we don’t have to get inflation back to target immediately because that would risk undesirable volatility in output and unemployment. We don’t have to create recessions to get inflation back to target quickly in the event of an oil price hike.
EUROWEEK: How much fuel is there left in the QE tank?
Tucker: Technically we could do more. It’s just a question of what we think the risk to inflation would be.
MPC Minutes, August 2012
A quick review of this month’s MPC minutes. Claire Jones at FT Money Supply notes that there was no discussion of a rate cut, unlike earlier months.
There is – finally – a warning on the strengthening of Sterling:
4. Sterling had appreciated further, particularly relative to the euro. In trade-weighted terms, sterling had risen by almost 1% since the Committee’s July meeting and was 3.5% higher than at the start of the year. Although sterling remained over 15% lower than it had been five years earlier, it was around 5% higher than its average in 2011. A continuing appreciation could have a material influence on the outlook for growth and inflation in the United Kingdom.
Overall the MPC are stuck in “wait and see” mode again. This comment scared me:
38. The Committee discussed whether it was appropriate to expand or continue with the programme of asset purchases it had agreed at its previous meeting. Inflation was still slightly above 2% but likely to remain close to the target in the coming months. The level of underlying activity was perhaps not as weak as the GDP data for the second quarter had suggested and, with the squeeze on real incomes beginning to ease, some recovery in spending was probable. The FLS had the potential to improve funding conditions for banks materially and to encourage lending, thus providing some support to both demand and supply. These effects might be particularly marked if the FLS allowed some households and companies to borrow who had previously been unable to obtain bank credit. Set against that, the FLS might prove less effective if uncertainty and risk aversion among households and businesses were the dominant factors holding back spending in the current environment. These same factors might also limit the effectiveness of additional asset purchases.
My emphasis on the “central bank impotence” view. There is so much uncertainty that asset purchases might not be effective.
And this beauty from the resident hawks:
For some members the decision [on more QE] was nevertheless more finely balanced, since a good case could be made at this meeting for more asset purchases. For those members [Ben Broadbent and Spencer Dale] who had voted against the expansion of the programme at the previous meeting, there were potentially costs to reversing the previous month’s decision.
What the hell? Doing more QE this month is “reversing” the decision to do some QE last month? And that risks what exactly? That the central bank looks really stupid? Our central bankers would rather not be seen reacting to “events” and changing course, month by month?
I think somebody should remind Messrs Broadbent and Dale that their comments in the MPC meetings are a matter of public record. And if they are worried about the central bank looking stupid, it might be better for them to shut up and, preferably, resign their positions.
“Current Stance of Policy Looks Broadly Right”
Markit reports:
UK Manufacturing PMI slumps to three-year low in May
Key points:
- UK Manufacturing PMI at 45.9 in May, from 50.2 in April
- New orders drop at fastest pace since March 2009
- Manufacturers cut back output, employment, purchasing and inventories
Never mind folks, MPC member Spencer Dale is on the case:
“At the moment, our view is that … inflation should slow to around the target at the back end of 2013 and as a result the current stance of policy looks about broadly right,” Dale said in a television interview with CNBC.
Spencer Dale shall henceforth be known as “Crazy Loon, Spencer Dale”.
Guardian Headlines You Didn’t Read Today, Spencer Dale Edition
“Crazy Central Banker Neuters Growth With Weird Obsession Over Inflation”
“More asset purchases by the Bank of England may not be warranted even if Britain’s economy continues to struggle, and the bank should keep its focus on bringing down inflation, its chief economist said on Wednesday.”
Warning: Watching this CNBC video interview (headline: “UK Economy on the Mend”) with the Bank of England Chief Inflation Nutter Economist may seriously damage your health.
Fiscal stimulus? Good luck with that. A high and stable level of employment? Good luck with that. The lunatics are running the asylum.
Now Would be an Excellent Time to Disinflate
The MPC minutes for May are out, along with the forecast data from the 2012 Q2 inflation report.
This confirms that the MPC have deliberately allowed the CPI forecasts from 2 to 3 years out to drift downwards slightly. The reason? The near-term CPI forecasts have moved sharply upwards; in February, the Bank’s median prediction was for a 1.6% CPI rate in the first quarter of 2013, that has now moved up to 2.6%. The burst of QE has “worked”: the probability of a downside CPI miss has been greatly reduced.
Bank of England Median CPI Forecasts
The IMF drop the ball and call for more QE, lower rates and/or fiscal spending. Believers in the multiplier fairy become ever more hysterical; having painted themselves into a corner where monetary policy is somehow “impotent”, they now hope to eat (almost) free lunches from doing deficit spending! Extensions of the Bank of England balance sheet will have no effect, but we can borrow and spend to boost AD.
Are you kidding me? Are those guys watching what the Bank of England is actually doing? The short-term CPI forecast has moved up, there are no “supply shock” excuses from VAT or commodity shocks, and the MPC are allowing a passive tightening of policy to get it down again, even at the expense of instability in the medium term forecasts.
Change. The. Damn. Target.
(With apologies for being a bit ranty)
Just Your Garden Variety Four-Year Depression
Sometimes I think we should cut the MPC some slack. The UK’s demand deficiency is mostly due to the failures of the inflation target, not the MPC’s actions per se.
Then MPC members like Paul Fisher foolishly decide to open their mouths:
“For me, the key reason for restarting QE last October was the possibility that the U.K. could topple over into a deep recession again. We seem to have hopefully headed that risk off at the pass. We’ve had a couple of quarters of negative growth, but we haven’t really had a fall back into a deep recession,” he said.
“If I saw that risk re-emerging, then personally I would want to think again about restarting. If there is not that serious possibility of deflation down the road, then I think there is less impetus behind doing more asset purchases.”
Yes, we’re just in your garden variety four year long depression, Mr Fisher, but at least we haven’t fallen back into a “deep recession”. And flexible inflation targeting has now been recast as avoiding the “serious possibility of deflation”?
Professional economists have been appointed as managers of aggregate demand, with almost unlimited discretion over their choice of actions. They so lack in accountability that they feel able to make these bizarre pronouncements without fear of being immediately hounded from office. The death of inflation targeting cannot come too soon.
