Thursday 17 February 2011

"King lifts lid on inflation error"

City AM's headline is presumably their entry in the "understatement of the year" competition, it's not some little minor technical error, it seems fairly fundamental. The article explains:

Inflation was higher than official figures suggested throughout the housing bubble and credit boom, the Bank of England admitted yesterday. Consumer price inflation was 0.3 per cent higher than previously thought every year between 1997 and 2009, due to errors on clothing prices.

Sales prices were wrongly assumed to be the norm, distorting the Office for National Statistics’ numbers. The blunder was bound to have misled the Bank, economists said, and meant that interest rates were kept too low for too long during the boom.


1. Well, given the BoE's remit of "keep the house price bubble going, or else", I'd say they got interest rates about right, but hey. If the BoE (and by extension the government) were actually serious about inflation (which they aren't and haven't been for ages) there's no need to go round measuring CPI, RPI and all that nonsense, it's quite sufficient to look at house prices/land values. If there is 'too much' money sloshing around, then it feeds through into higher house prices/land values; so if they are rising faster than x% then that is a sign of inflation.

2. Mainstream economics* says that a) you can combat inflation by increasing interest rates, but b) that has a negative impact on the economy. This is the excuse they are now using to ignore inflation that is running way over the official target of 2%, although the real reason they don't dare increasing interest rates is because their precious house price bubble would finally pop.

3. So what the article is saying is that they completely failed to notice the house price boom, and if only some statistician had weighted clothes prices slightly differently, then none of this would have happened? Is anybody really that gullible? I suppose they must be - Mr Butler fell for it hook, line and sinker:

“If the ONS had got its figures right, the Bank might have moved more quickly to raise rates and get us out of the cheap-money spiral that caused the housing and borrowing bubble, and the inevitable bust that followed,” said Eamonn Butler of the Adam Smith Institute think tank.

4. It appears that banking shill Allister Heath on page 2 of the same paper is only too keen to toe the party line:

This may seem like a small error but it was a major gaffe. Interest rates would undoubtedly have been higher every year during the bubble had the Bank known prices were going up as much as they were. Even half a per cent more on rates would have dampened credit growth and property prices; the bubble wouldn’t have been as bad.

* Proper economics says it's best to leave interest rates to the markets and to prevent bubbles in house prices/land values by taxing them (which does not damage the real economy, and the receipts can be used to pay off national debt or reduce other taxes, which boost the real economy even more in a virtuous circle), but this is a separate debate. DBC Reed-onomics goes even further than this.

9 comments:

formertory said...

Successive governments of all political stripes have been very, very serious about inflation - they lied, of course. They've nurtured it, fed it, cared for it, lied about it going away and pretended to control it.

All because it helps them claim they're paying down the State's liabilities "as a proportion of GDP" (should that in fact be "a multiple of GDP"?) without having actually changed anything or done anything different.

I had hoped against hope that this lot would be different but the rate at which Camerborne announces new policies and cuts and then withdraws them is becoming tiresome.

DBC Reed said...

No time to expound on DBC Reed-onomics: too busy enjoying the following slap-down in Guardian page 2 three paras down in Cameron U turn story : "Spelman is finished".And the Germans say we don't get schadenfreude.

Mark Wadsworth said...

FT, inflating away govt debt may be part of the motivation (fair enough, the gilt holder's loss is the taxpayers' gain) but as neither party has ever seriously tried to reduce government debt, I am quite convinced that it's house price inflation that really motivates them.

DBC, I didn't explain DBC Reed-onomics as I think it's going a bit too far, but there is something in it. As to Spelman, I think it's a bit too early to start singing "Ding dong, the witch is dead".

Bayard said...

Has the error been blamed on a "junior member of the organisation who has since left" yet?

Scott Wright said...

Which begs the question: how many additional months during that 12 year period should (I know it's your favourite word..) the BoE have had to explain why it did not keep inflation below its target level of 2%?

Mark Wadsworth said...

B, the ONS fell out with the government years ago because they didn't want to move to Newport and having been doing their best to piss them off ever since.

TBH, it wouldn't surprise me if the original figures were in fact accurate and the government is now getting its own back by trying to heap the blame on the ONS.

SW, if we look at house price/land price inflation, then just about every month!

chefdave said...
This comment has been removed by the author.
chefdave said...

What a preposterous story, are they really saying that the global financial meltdown was due to Topman having a prolonged T-shirt sale?

It just makes me want to walk into the offices of City AM and beat the author of this article silly with my copy of BoomBust.

Mark Wadsworth said...

CD: "Are they really saying that the global financial meltdown was due to Topman having a proplonged T-shirt sale?"

Yes, it would appear so. And people like Butler or Heath are either stupider or more corrupt than I thought.