Has the Bank been double-dealing on inflation? That's the criticism which makes members of the MPC nervous, even those who are comfortable with leaving policy unchanged this week, for the 14th month in a row.
The charge is that, whatever you think about the Bank's current approach, it's inconsistent with the way it acted in the early years of this century, when the imported price pressures were pushing prices down, not up. The suspicion is that the long-term target isn't really 2%, it's a bit higher - because overshoots are tolerated, but undershoots are not.
The case for the prosecution starts with that earlier period, roughly 1998-2005, when globalisation seemed to be a force for "good" deflation, and the price of toys, clothes, shoes and anything else with a "Made in China" sticker was falling. In a sense, the Bank faced the same choice then that it does now, only in reverse. It could either let inflation stray from target for an extended period - in that case, below it - as a result of this external "shock", or it could set official interest rates to meet the target, in effect forcing domestic prices to adjust instead.
As it happens, I had many conversations about this with senior people at the Bank at the time. (I was much taken with the idea that globalisation had weakened the link between domestic monetary policy and domestic inflation.)
The Bank's view, clearly expressed in a speech given by Charlie Bean in October of 2006 was that globalisation did not, in the long run, undermine a central bank's ability to control domestic inflation. He also suggested that the Bank should stick to its remit and focus on the overall price level, not relative price shifts within it:
"Imports are only one part of the consumption basket, and what happens to the general price level also depends on what happens to the prices of domestically-produced goods and services. The prices of tradable goods that are close substitutes for the imports may be driven down, but the prices of other goods and especially non-tradable services can rise faster. This may happen automatically, if consumers react to the rise in purchasing power associated with cheaper imports to increase their spending on other goods and services, driving up their prices. But even if it doesn't, the overall inflation rate should in the long run remain unchanged, provided that the monetary authorities ensure that steady growth in overall nominal demand is maintained through an appropriate monetary policy. If a country does not fix its exchange rate and is free to pursue an independent monetary policy, it can ultimately always choose its own inflation rate."
In plain english, this says that the Bank of England shouldn't be too worried about which prices in the economy are falling and which prices are rising. What matters is what is happening to the price level overall. You should enjoy the fact that your children's (imported) toys and shoes are getting cheaper, but don't be surprised if the price of (not imported) childcare goes up instead.
Charlie Bean has some interesting - and highly relevant - things to say, later on in that speech, about the impact that these terms of trade shocks could have on economic growth. I hope to get into those in a later post. My goal, here, is to get to the bottom of this question of whether the Bank has been inconsistent.
The strong perception in the City, and even among some in the Bank, is that they have. They have been more tolerant of inflation going above target in the last few years than they were of potential undershoots in the target, when external pressures were more benign. The MPC might have followed the Bean approach in 2006 - but not in 2010.
You can make a case for that kind of asymmetric approach: when there's a risk of a deflationary spiral in an environment of very high private and public debt, the potential cost of allowing inflation to slip to zero are almost certainly greater than letting it go to 4%. But this is not an argument that the Bank has chosen to make in defending its record.
Nor has the Bank ever published a forecast, in either period, showing inflation significantly off target at the end of the "forecast period" (though they did, somewhat sneakily, extend the forecast period from two to three years a while back.) If it's got an asymmetric inflation target, the MPC has not told the Chancellor or anyone else about it. The line at the Bank is that they have simply got their forecasts wrong.
The best way to answer the issue is to look at the evidence. The chart below shows what has happened to goods and services prices, and the CPI, since the Bank became independent in 1997. It's actually an updated version of the chart Charlie Bean used to illustrate his point in that 2006 speech.
The chart shows clearly how the price of goods - which these days tend to be set globally - fell consistently in the first part of the century. That is what you might call the 'China effect'. You can also see that the inflation rate for services, most of which are not subject to foreign competition, rose over the same period - just as Bean suggests in that speech.
Then, look how the situation changes in the later period: a couple of upward lurches in goods price inflation, which have not been offset by falling inflation elsewhere. It looks like a step change, up, in the CPI.
Game set and match, you might think, to the critics of the Bank. Except - you can't help but notice that CPI inflation was below 2% for most of the 1998-2005 period. For much longer, in fact, than CPI has been above target now.
True, they were not targeting the CPI then: the target was RPIX inflation of 2.5%. But when the change was made, the new target of 2% was felt to compensate for the fact that RPIX tended to be higher. In other words, if there were a significant bias, you would expect to see it in the CPI as well as the broader measure
It's also true that the external price shock has been much sharper, in this more recent period - and much less predictable. The price of manufactured imports has risen by 24% since the end of 2006; the fall in the previous ten years was in the region of 12%.
Finally, if there had been a consistent bias in the Bank's approach you'd expect to see it in the results: in the long run average rate of inflation since 1997. Here's the most interesting nugget of all: the average annual rate of CPI inflation for every month since 1997 has been 1.9% The average inflation rate on the old RPIX measure has been 2.76%.
What those figures tell you is that the cumulative overshoots in CPI inflation in this later period have actually been smaller than the undershoots that occurred before 2005. They also tell you that, if the Bank does have a secret, higher, inflation target, they've not been very good at delivering it.