11th January 2012 by Shaun Richards
Today has opened with the news that one of the main energy suppliers in the UK, EDF energy has announced plans to reduce its gas bills by 5% from February 7th of this year. I notice that some elements of the media in their rush to present this news are announcing that it has cut prices rather than it plans to. But it does raise the issue that as the increase in the rate of Value Added Tax which took place at the beginning of 2011 falls out of the annual rate of inflation soon we will see the headline rate fall. I suspect also that there was some price-cutting over the Christmas period and we will see a temporary benefit from the delay in the introduction of a 3 pence increase in fuel duty (from January to August). Accordingly the headline annual rate of Consumer Price Inflation is likely to be 3 point something early in the New Year as opposed to the 4.8% it was most recently measured at.
Not everything is falling however
The first point to make is that prices are still rising simply that they are likely to do so more slowly for a while. There remain upwards influences from what I call institutional inflation in the UK. For example average rail fares have just risen by 5.9% and on a more personal level the annual ticket for using my local running track has risen by 6.1%. If we look at the approval of the HS2 line yesterday ( for foreign readers this is a new main rail hub from London to Birmingham initially and then later to go further north) I wonder if the inevitable cost overruns will lead to upward pressure on rail fares as it progresses over the next decade. A bit like the £2.4 billion bill for the 2012 Olympics became £9 billion or so.
In addition we see that whilst the commodity price surge of 2011 has calmed down and to some extent reversed the price of oil has remained firm. I discussed this only on Friday in more detail but as I type this a barrel of Brent crude is priced at US $113.20 which is up 16.42% on a year ago and of this,somewhat disturbingly, approximately half of this rise has taken place since December 19th (8%). Over the past 24 hours the price of Orange Juice futures has followed the pattern described in the film Trading Places as we have seen the price of OJ rise by 11% and I notice today that the Financial Times is saying that it’s price has risen to a 34 year high. Actually the more I investigate this the more I am reminded of the plot in trading places with some talking of fungicide problems and others of weather colder than expected.
The fundamental point is that some inflationary influences remain and on the 7th of December I wrote again to Mark Hoban who is the Financial Secretary to the Treasury to make this fundamental point.
1. The trajectory of inflation as I have discussed above looks likely to continue to be higher than one would expect in our current and likely economic circumstances.
In other words the policy of the Bank of England is failing. For those who wish to review my original suggestion for reform I will repeat it below and I will also put a link to my article of the 28th of November where I discussed Mr. Hoban’s first reply.
My suggestion for much needed reform at the Bank of England
I have a policy recommendation and it does indicate quite a change. As the role of the Monetary Policy Committee has changed and expanded more than could have been forecast when it was introduced back in 1997 there now needs to be new checks and balances on its power. My suggestion for a change is that MPC members should stand for election as they are currently much more powerful than many of our elected representatives.
Mr Hoban’s latest reply
A critique of the reply
Firstly he certainly does not agree with the former head of the European Central Bank Msr. Trichet. You see Msr.Trichet was very proud of the fact that the ECB had achieved an average inflation rate of 1.97%. Whereas Mark Hoban tells us that such a performance would mean.
Interest rates would be changing all the time,and by large amounts,causing unnecessary uncertainty and volatility in the economy.
Instead Mr Hoban feels that the Bank of England should operate such that inflation.
can be brought back into target within a reasonable time period
As it has been over target for two years now and most recently more than double it, what is a reasonable time period Mr. Hoban? It was kind of him to already answer this question in his letter without me even asking as he later tells us.
Monetary policy operates with a time lag of about two years
Ah yes the same two years as it has now been over target.
So if we factor in the current situation which is of a weakish recovery and possible relapse we are left with the thought that inspite of the official denials we are getting an implicit confession that policy is not aimed at the 2% inflation target.
Readers may like to peruse closely the fifth and sixth paragraphs of the letter which are in response to my point that increasing the amount of Quantitative Easing when inflation is way above target is an odd thing to do when the Bank of England itself says that QE stimulates the economy. The Bank of England has changed its website on the subject of QE as it now mentions “projected inflation” as its rationale rather than exisiting inflation which is sneaky to say the least. The reason for this is quite plain how can you achieve an inflation target by using a stimulus when you are way above target?
Bank of England forecasting failure
Mr. Hoban tells us that inflation is “expected to fall back sharply in 2012 and 2013 as temporary factors pushing up inflation wane”. Let us consider this and as evidence I present a letter from the 5th of November 2009 from the Governor of the Bank of England Mervyn King to the then Chancellor Alistair Darling.
On balance, the Committee believes that the prospect is for a slow recovery in the level of economic activity, so that a substantial margin of under-utilised resources persists. That will continue to bear down on inflation for some time to come, offset in the short run by the impact of the past depreciation of sterling.
Yes there you have it they were telling us projected inflation will fall ahead of the current inflationary episode. If you want more examples of their forecasting failures there are plenty in the article I have linked to above. I will leave it to readers to decide whether these continual errors are deliberate or the result of incompetence.
An area which remains unaddressed
In addition to the issues described above I challenged Mr. Hoban on the issue I describe below.
To this I would add that the new Extended Collateral Term Repo (ECTR) Facility is in effect an admittal from the Bank of England that it should not have accelerated the withdrawal of the Special Liquidity Scheme. I have argued that the withdrawal of the Special Liquidity Scheme was a mistake for a year now and the link below is from then to prove the point.
Quantitative Easing update
This afternoon the Bank of England plans to purchase some £1.7 billion of UK Gilts (government bonds) in the maturity range 2022 to 2036.
Apologies for today’s post being behind time. I had a problem scanning the letter and had to try an alternative system.