CPI 4%: What's the point of a target?
The ONS has just announced CPI inflation is 4%.
Inflation is, and has been, way above target for most of the last two years. The Bank of England claims it is "looking through" such inflation to the longer term.
This, frankly, is called ignoring your own target.
There are very good reasons to do so: first, the Bank is right that the global price pressures are not easily dealt with by depressing the spending power of UK consumers. However, if you accelerate those price pressures by deliberately talking down sterling, and lauding your own achievement, then don't complain about being at the mercy of global inflation.
Second: if they hike interest rates very much right now it will tank consumer spending power, growth and therefore the recovery. This in turn will mean the deficit reduction plan having to be even harsher than currently planned.
Third, by mutual tacit arrangement with the Treasury, the Bank stands ready to loosen monetary policy (ie keep rates at near zero and print more money), should the long-expected rebalancing of the economy fail to occur, and we get a public-sector led second recession.
Last year, on the eve of QE2, the US Treasury and central bank toyed with the idea of "targeting" bond yields. That is, declaring that they would go on printing money until the effective interest rate on government borrowing fell to, say, 2%. That's an entirely logical and orthodox thing to do for those who've studied other QE experiments.
However, targeting interest rates means not targeting inflation.
But the Bank of England can't seem to have this debate, because its remit is fixed. Indeed even its critics are compelled to debate the Bank's performance against the given inflation target. So we are left with a target that is increasingly in the markets understood as fictional.
Once the markets believe someone's targets are fictional they tend to test this hypothesis, rather in the way rugby flank forwards tend to test puny centres whose commitment to tackling is believed to be fictional.
And so, intuitively, to consumers. In their alter-ego as workers they begin to put in wage claims for 5% on the grounds that "you need 5% just to stand still against the real cost of living" (RPI is now 5.1% and rising).
The inflation target was designed by Gordon Brown in an era when the net impact of China on the world was deflationary: now it's inflationary. And when we thought we'd abolished boom and bust (now we haven't).
So is it time to rethink the inflation target? We might discuss this on Newsnight if we can get any of the politicians interested in the question.
And by the way isn't it time the mandarinat of Threadneedle Street started engaging with the British public on these issues: in actual interviews where actual journalists get to ask them actual questions - not the medieval ritual the Bank has constructed around the Quarterly Inflation report (of which more tomorrow)?