Monday, 25 June 2012

Has the Bank of England missed its inflation target?

Martin Weale writes
Over the period since I joined the MPC, the average inflation rate has been just under 4% per annum.
The target is 2%.

What can one say?
1. Martin also sets out the following graph:

As it says, there are numerous exceptional factors here, leaving him to point out:
Had fuel prices risen in line with the rest of the CPI and had VAT not gone up, then the average increase in the CPI index since I joined the MPC would have been, at an annual rate, 2.9% rather than just below 4%, still above target but less of an embarrassment.
Very nicely , he also points out 
But, while I am comfortable leaving out the effects of VAT, it can reasonably be asked whether picking and choosing beyond this gets us very far. The target we have been set is the Consumer Price Index, not the Consumer Price Index excluding this or that. ...had the MPC been able to persuade the public that they should focus their consumption on audio-visual, photographic and data processing equipment the price index would have fallen by 9 per cent at an annual rate. At least this would be true provided that people sat in the cold and did not watch television. The price of electricity has, after all, risen along with that of other domestic fuels
2. what are the Bank's objectives in fact?
When there is an adverse demand shock then inflation and growth go down together.  but with a cost shock, then high inflation comes with slow growth, so there is a trade-off.  What to do?  A statutory institution should look to what Parliament sets it to do.  The Chancellor writes to the Bank every year to set out the objectives.  Here is the 2011 letter: 

"The framework takes into account that any economy at some point can suffer from external events beyond its control....Attempts to keep inflation at the inflation target in these circumstances may cause undesirability in output"