So why are we obsessed about inflation in that case?
And why are we making the Bank of England Monetary Policy Committee run monetary policy in the UK as if inflation is the only thing that matters when, in practice, we had no serious inflation at all from about 1995 until 2021?
Now, I’m not saying there was never any inflation risk in that period, but in practice, there was hardly any. And there might well be none for some time to come, until we get another external shock. Even 2008 couldn’t create one in this particular case.
So, inflation is not the threat that everyone pretends it is. And in that case, Danny Blanchflower and I will be saying, “Why does the Monetary Policy Committee have the job of running monetary policy, that is the interest rate setting policy of the UK, with the aim of eliminating inflation when, frankly, when inflation happens it goes away of its own accord, without having to change interest rates, and why does it have to do this when there are much greater priorities to address?”
There’s not been much inflation when an indepdendent central bank was tasked with managing inflation to a low target.
Therefore, the central bank should stop being independent and government should run it.
Blanchflower and Murphy, learned economists from the Weimar School
“when, frankly, when …”
“Frankly” has always struck me as code for “I am a bit of a liar”. Like “to be honest” or his speciality “candidly”. Americans used to use “sincerely” with, I think, much the same meaning.
“Frankly” has always struck me as code for “I am a bit of a liar”. Like “to be honest” or his speciality “candidly”. Americans used to use “sincerely” with, I think, much the same meaning.
No, not really. Septics usually use ‘Frankly’ and ‘To be honest’ when they want to lie through their teeth.
Isn’t it generally accepted that the Cantillon Effect has been at work, with the new money pouring first into bond and equity markets causing asset price inflation?
That is, the inflationary effects of QE were sequestered there, and are only now pouring out into consumer prices?
And as they do, more and more of our income will be diverted away from the things we merely want, to the things we absolutely need? Or more clearly, as bread gets pricier, so we buy fewer toys.
Of course before we curtail such spending and upset our toddlers, lots of us accrue debt. So we should be seeing higher levels of unsecured debt?
“when inflation happens it goes away of its own accord, without having to change interest rates”,
Really? Why then have central bankers used interest rates to ‘deal with’ inflation all these years? If these guys (Murph and Danny) know the answers and everyone else is dumb, why aren’t they at the helm of some monetary policy commitee somewhere?
What makes it worse was that Danny was…..
“There’s not been much inflation when an independent central bank was tasked with managing inflation to a low target.”
Can we really say that the last 25 years of low inflation has been down to the wise management of the likes of the BoE? Personally I’d say that it was more due to a) the deflationary effects of globalisation b) the wage restricting effects of mass immigration and c) the taming of the OPEC cartel by the US fracking industry. All of which are entirely out of the control of the MPC.
@ Jim
I am old enough to remember a decade of low inflation prior to “the oil price shock” so I can agree that the factors you cite had a significant impact, very probably more than the BoE, but the slowing of wage inflation is less due to mass immigration than Lady Thatcher’s Trade Union reforms that required union leaders (except Arthur Scargill) to get a mandate from their members before calling a strike.
Two other reasons for the low level of REPORTED inflation is the exclusion of Housing Costs (quite important as the price of houses went up by more in the first ten years of “New Labour” than they had done in thje previous thousand years) and the error introduced into the formula for calculating RPI in the autumn of 1997 and only corrected in ASutumn 2010 so that the inflation rate under Brown’s rule as Chancellor/PM was understated by “up to 1% pa” (this also led to the overstatement of RealGDP growth rates under “New Labour” by up to 1% pa – pretty significant to their claim that growth was higher under Brown than Cameron – in reality it was not)
In fact we can say that the evidence of the last 2-3 years proves that whatever the BoE have been doing over the last 25 years, ‘wise management’ it was not. They just got lucky that factors outside of their control were working in their favour for such an extended period of time that they started to believe their own hype. And the first time those external factors worked against them they were found wanting.
@Jim
Maybe it was just luck, but the right(ish) side of this chart looks a lot better than the left
https://www.inflationtool.com/rates/uk/historical
I suspect @jim is correct. The last 4 years saw the BoE merrily ignore the impact of hundreds of billions of additional government spending on inflation. Sheer hubris like this makes you wonder whether the politicians could have been doing a better job 🙁
Since I had my roof replaced I’ve had no rain getting into the house, so candidly, the roof is a waste of resources, I should get rid of it.
Have I got this right?
He’s arguing that in all those years we had the MPC managing policy to meet a 2% inflation target but as we didn’t have any runaway inflation we didn’t need the MPC?
That is his argument, yes. And Danny Blanchflower, his co Mile End Ecconomist, was a member of the MPC….
“Maybe it was just luck, but the right(ish) side of this chart looks a lot better than the left”
The BoE might have made a better fist of the pre-1997 era than the politicians did, but I think the politicians who were in charge in those days would have killed for cheap goods raining into the country from China, Eastern Europeans driving down wages left right and centre, and someone taking on the OPEC cartel. The inflation history of the UK from 1970 to 1997 is one of oil price shocks and wages/price spirals every 7-8 years. The BoE post 1997 never had to deal with a wage price spiral thanks to mass immigration, and the only spike in oil prices in 2008 was rapidly nixed by the GFC. rather than any BoE action. Post 2010 US fracking has prevented any massive oil price spikes, so since then the BoE have been able to largely ignore oil prices entirely. IMO the two periods are like chalk and cheese, not comparable at all.
@ Jim
The politicians in charge in the 1950s could all remember the 1930s and were more concerned with avoiding mass unemployment than inflation.
@Jim – “Can we really say that the last 25 years of low inflation has been down to the wise management of the likes of the BoE?”
Maybe not. Maybe the BoE is fairly incompetent and has little effect. But what we can be sure of is that putting politicians in charge would likely be a lot worse. Don’t fall into the idealist’s trap of comparing a real system with some imaginary one.
” But what we can be sure of is that putting politicians in charge would likely be a lot worse.”
The politicians are already in charge of the BoE. Just not elected ones. Every decision they make is political. The decision to print hundreds of billions for covid was a political decision. It wasn’t economically necessary, what Sweden did proves that. The decision to cut Liz Truss’s government off at the knees was an overtly political decision. Personally I’d rather have politicians I can vote out of office in charge of the money than a bunch of unelected bureaucrats who I have no control over whatsoever.
Houses have become a lot more expensive as have rents – but who cares about such trivial things
A good argument for the BoE to have a house price inflation mandate, and any failed planning applications go to them on appeal rather than the Secretary of State. Simpler systems are available but that’s the best one we could get in the current framework.