Home > Inflation, Monetary Policy > Progressives Should Get off the Fence about Price Stability

Progressives Should Get off the Fence about Price Stability

This is what Resolution’s Matthew Whittaker had to say about inflation in a piece for the Independent earlier this month, titled “Why the Bank of England should target wages as well as unemployment“:

Nothing at all.  There is no mention of the word “inflation”, nor of the “CPI”, nor even “prices” in a piece purportedly about UK macroeconomic policy – about UK monetary policy.  I’m sure Matthew is a good guy, and I’m not trying to pick on him specifically, but that is a beautiful illustration of how I see centre-left/progressive economists addressing UK inflation over the last five years.  The motto is “Don’t mention the warCPI.”

Yet at the same time the centre-left political movement has been obsessing about inflation – that is literally what the “cost of living crisis” means.  Yes, you can come up with a different translation of that phrase, but the CPI really is how we measure “the cost of living”.  It is going up, and that is a “crisis”.  In fact it is even worse: progressives love to exaggerate the extent to which the “cost of living” has risen, by deflating nominal wages by the RPI (rather than the CPI) to show just how badly real wages are suffering.

This is all both depressing and frustrating to watch.  I’d roughly agree with Mr. Whittaker’s eventual conclusion, that targeting nominal wages (or nominal incomes) is a good idea.  But he gets there from talking first about real wages, and then median wages (which is almost as bad), without use of the word “nominal”, so it is not totally clear he even wants a nominal target, but let’s assume he does.  And so does Mr. Whittaker want the Bank to continue targeting the CPI… and unemployment… and add nominal wages as well?  Really?  All of those things at once?

I have a relatively simple narrative about what the BoE has been doing for the last five years: roughly what they’ve always done, keeping the “risks to inflation broadly balanced”… around the 2% target.  I construct that narrative based on what the MPC have been saying for the last five years, month after month after month.  What that means in practice is that the Bank steer a course for nominal demand (NGDP) which is sufficient to keep the CPI on target.

And so the Bank defend their policy stance based on those damn CPI numbers.  Is that wrong?  Why should it be – hitting the CPI is their legal mandate!  How can anybody possibly argue that UK macro policy was too tight ex post, at the same as attacking the government because “the CPI is too damn high”.  That would be utterly ludicrous… and it is the critique of Coalition macro repeated endlessly for the last three years.

There are more complicated narratives too.  Maybe that unexpected shocks to nominal demand have resulted somehow more in lower measured productivity and output, less in lower prices/inflation.  OK, maybe that is a bit true, and I hope it is a bit true.  But if that is even a little bit true, then inflation targeting is the worst possible monetary policy you can have, and you need to be openly screaming about that fact.  “Inflation targeting is not working“, you might write.

Instead the best and brightest on the centre-left have been producing critiques of UK macro policy along the lines of:

a) Monetary policy is not a panacea.  (Well, thanks so much.  Jens Weidmann totally agrees with you.)

b) We need more infrastructure spending.  (Brilliant.  And what about macro policy?)

c) No really, we need more infrastructure spending.  (Yeah, but that’s not a macro policy, is it?)

d) I insist there is a big output gap because X, Y, Z.  (Fantastic!  The Bank are still targeting the CPI.)

e) Infrastructure spending?  (Please stop.)

f) How about we target a real variable like unemployment?  (Yeah, the 1970s were brilliant.)

All of that serves only to duck the real question… the nominal question. The nominal question appears to me to be remarkably simple:

What is more important: (1) output/consumer price stability, or (2) nominal wage/income stability?

If you want “price stability” then you can’t have nominal income stability.  We’ve tried that.  Productivity shocks are horrible, and inflation-targeting seems to make them much worse.  And if you want nominal wage/income stability then you can’t have “price stability”.  We need to be open about that, with the politicians and the public; “price stability” was a good idea which failed.  Can we do better?

Now, please, get off the fence and decide what you really, really want.

Categories: Inflation, Monetary Policy
  1. SK
    November 29, 2013 at 16:19

    Inflation targeting is not working because the BoE is not targeting inflation.
    Currently their moto is “anything but raising rates” and yes inflation will be back within target in 2 years (sorry 3, sorry 4, sorry 5, sorry 6 and so on) while at the same time fiscal policy has the moto “all our money to subsidise the housing market”.

    The Opposition is not much better as you highlight. They have a point about the Cost of Living but as Osborne has done they want to push the responsobility to fix this to the BoE.
    Ofcourse, they dont want to mention the CPI because they also follow the same mantra “anything but raising rates” and “do not mention the housing market”.

    I dont think price stability has failed. BoE has not even tried to do anything about price stability the last 5-6 years. They have stayed on the fence and did not do anything about the high CPI/RPI as they also have done nothing of the opposite that yourself was asking for.
    And right now, they wont do anything at all since it is obvious (see HTB) that they are not independent.

    As for targeting the wages, surely there must be a discussion where the problem has lied with the UK economy the last years? Was it the monetary policy or the fiscal? Whats the point of adding a new variable if none can estimate yet the impact of the unemployment rate% target?
    Finally, how can you compare unemployment rate% and wage increase% throughout the years if you do not take into account the impact of technology/volumes etc?

    • November 29, 2013 at 17:14

      “the BoE is not targeting inflation” SK, this kind of comment is not really serious. Yes, they are. Yes, we can also argue about how well or how badly they are doing it. Those are separate issues.

      “I dont think price stability has failed”

      What would failure look like then? And please don’t use circular arguments about price stability being the goal of price stability.

  2. ChrisA
    November 30, 2013 at 04:33

    I don’t usually mind an adversarial approach to politics which is the UK tradition, But the debate on monetary policy in the UK is getting pretty silly, with Labour and the left basically tying themselves in knots as they try to land some punches on Osbourne. The debate in the US is a lot more sophisticated I hate to say, with people like Krugman actually having cogent things to say even when I disagree with his politics. Is there any equivalent to him in the UK?

  3. James in London
    November 30, 2013 at 07:30

    Simon Wren-Lewis
    You will disagree with his socialist/constructivist/”wise and efficient state” vs bad capitalist bias. But he is quite good on monetary policy.

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