Bank of England barking mad

The BBC reported earlier this month about the results of the Monetary Policy Committee (MPC):

The Bank of England has indicated that the pace of interest rate increases could accelerate if the economy remains on its current track.

Bank policymakers voted unanimously to keep interest rates on hold at 0.5% at their latest meeting.

However, they said rates would need to rise “earlier” and by a “somewhat greater extent” than they thought at their last review in November.

Economists think the next rate rise could come as soon as May.

The value of the pound jumped by about 1% against both the dollar and the euro in reaction to the Bank’s comments.

You have to wonder what the eminent experts on the MPC drink in their tea to be so off course about the current track of the UK economy.  We have to wait a long while but late last week the Office for National Statistics did report on the most recent quarter for NGDP growth, the only economic measure under the control of the BoE.

It showed the annual growth had fallen to a worrying low 3.2% and the QoQ (annualized) growth to just 2.8%. It is no wonder that RGDP is being dragged lower and lower, too. Without healthy nominal growth, there can be no prospect of healthy RGDP growth, a very necessary but of course not sufficient condition.

No surprise either that the GBP currency jumped 1%, evidence that the MPC were unexpectedly out-of-tune with markets about the underlying trends in the UK economy. It seems as if they have learnt nothing about temporary bouts of inflation and the absolute need to ignore them. The best measure of “inflation” for the whole economy remains the GDP Deflator and its growth rate is falling back rapidly having moved up surprisingly sharply after the post-EU referendum devaluation.


We did hear a year or so ago about the need for symmetry when it came to worrying about inflation, that overshoots could balance undershoots and vice versa. In addition, we heard that a period of above target inflation would be tolerated for some time. Well, now that the CPI has moved above target the MPC seems to panic.

There are more encouraging signs that some UK commentators see the (increasing) futility of targeting inflation and recommend targeting nominal GDP instead. Hats off to Ed Conway, the Sky News economics editor and (London) Times columnist, for pointing out that the increasing use of personalized pricing for even everyday mass market, but internet-purchased, products and services is making it harder and harder for CPI-type measures to accurately calculate retail inflation.

What we do know is that search engines routinely direct more affluent customers towards higher priced versions of the same goods. We know that certain travel sites direct online shoppers using expensive Apple computers towards more expensive hotels. We know that the taxi company Uber now uses willingness-to-pay as one of the bases of its mysterious pricing formula, at least in the US. Where previously its prices were based on time and distance travelled, the algorithms behind its new upfront payment system consider how well off the riders are, based on whether they are travelling between wealthy neighborhoods or poor ones.

This kind of thing is set to become more widespread in future, which raises all sorts of questions. If we all pay different prices for the same goods, does it widen the gap between haves and have nots? And what does it spell for inflation — the rate at which prices are supposedly rising across the economy?

Which brings us back to the Bank of England. Either it must become far better at measuring millions of individual prices across the economy, or it will have to relegate inflation as a yardstick. As it happens, there is increasing evidence that nominal economic growth would make for a far better target anyway. The rise of personalized prices may turn this from an option into a necessity.

image_pdf
Share

1 Comment


Leave a Reply