Inflation: Mervyn and me
This morning I inadvertantly volunteered to serve on the UK's Monetary Policy Committee. For some reason, almost at the same time, the pound slumped against the dollar. But I am glad to say the two facts are not linked.
Mervyn King, the governor of the Bank, had been explaining how "there was no obvious answer to the question" of what to do about 4% inflation; and that what mattered was not the inflation rate now but in 3 years time.
I pointed out - see the clip above - that the inflation rate does matter to people seeing their wages disappear into their local Costcutter at an alarming rate. And that it was 4% as a result of a series of decisions taken by him - namely to revel in the fall of sterling, to print £200bn and to cut interest rates to their lowest level since Samuel Pepys.
At this point the governor invited me to explain what I would have done and I made a possibly unguarded suggestion that they might like to stick me onto their committee and find out.
Mervyn King then pointed out that I have not exactly been an inflation hawk over the past 36 months, and that I would have possibly been the first to raise questions had they raised rates sooner and tanked the economic recovery.
I replied that this was a fair point, and that maybe there really is nothing the Bank can do, but that therefore the man in Costcutter should probably conclude that the 2% target is a fiction. The governor rejected this.
The substance of today's press conference however, was still grim, despite these moments of levity. What Mervyn King was at pains to explain is that "we are only now seeing the impact of the 2008 events" on people's real incomes. Either your wages are eroded by inflation or by rising mortgage interest rates and credit card bills. That's the Hobson's Choice you are faced with once the banking sector collapses and has to be bailed out, and then the bailer-out - ie the government - gets forced into the biggest peacetime austerity programme in living memory.
And he is right. But what I was doing with that question is trying to let some of the frustration that is out there among our readers and viewers into the perennially genteel world of the Bank, Treasury et al. What Mervyn King is really saying is: direct your anger somewhere else - and in numerous speeches he has made clear where that should be - at the bankers and those who mis-regulated them.
(I should add that I am not seriously volunteering to be on the MPC: I would expect wholesale capital flight, let alone a collapse in sterling were this to happen)
However it might not be a bad idea to put a few ordinary people on the MPC. Because, in the end, all it has to do is tweak a dial, 0.25% this way or that. Anybody who has used a faulty shower mixer could do it.
Ultimately, the reason sterling fell during Meryn's press conference was more prosaic. Having got themselves into a froth about imminent interest rate rises, following Mervyn King's letter to the Chancellor yesterday, the writer of that letter then effectively blew away the froth.
I read the subtext of Mervyn's rationale for that, with repeated references to "unforseen shocks", as as follows: until we know the European banking system is safe, and that the Eurozone authorities are not going to run around like Fred Karno's Army when the markets finally flatten Portugese sovereign debt, we can't really project anything safely, and therefore monetary strategy cannot become decisively tighter.