Bank of England Chief Economist: Avoid the inflation surge ‘like the plague’


“A surprise on the upside for inflation is one of the biggest risks”; we would need “to tighten policy even faster or on a larger scale, or maybe both, so as to stave off the recovery.”

By Nick Corbishley for WOLF STREET:

“The situation we must avoid, like the plague, is one where inflation expectations adjust before we do, or where we wait for proof that the effects on inflation are not transitory before acting,” mentionned Bank of England Chief Economist Andy Haldane at the Special Treasury Committee this week. “Because in those two cases, it would be too little too late.”

It’s not every day that you hear a central banker in an advanced economy voice his concerns about soaring consumer price inflation. Most of the time, central bankers do everything they can to minimize these fears. Current price increases, they say, are “transient” or “temporary” and as such there is no cause for concern. Haldane disagrees:

With interest rates at zero, give or take, and with the government and the Bank of England injecting “unprecedented peacetime fiscal and monetary stimulus” into the economy, Haldane believes that the reduction in purchases of BoE bonds is not enough; it’s time to “turn off the tap,” he says. “This is serious money, approaching £ 1 trillion in QE.”

“It’s clear if you talk to businesses across the UK right now that among the top three issues is this pipeline of very large cost increases. It’s hard to find a lot of things, whether goods or assets, that are not increasing at the moment, with the honorable exception of Bitcoin. “

Haldane’s comments are also worth highlighting given that consumer price inflation in the UK is not yet as high as in the US and other economies. It more than doubled in April, mainly due to rising energy prices and clothing costs, but it still reached just 1.5% in April, from 0.7% in March – a loss lower than the 4.2% increase in consumer prices. Index in the United States.

Haldane will no longer be chief economist and executive director of monetary analysis and statistics at the Bank of England. He is expected to leave the bank in June, after accepting an offer to become CEO of the Royal Society for the Arts in September.

But before leaving, Haldane makes a few waves. At the last Monetary Policy Committee (MPC) meeting, Haldane was the only member to vote to lower the UK’s quantitative easing program from £ 50bn, to £ 845bn, citing inflation problems. And that, it seems, has touched a few nerves. David Blanchflower, former MPC member, mentionned that while the panel’s dissenting voices were important, Haldane was dissenting on the wrong side:

“He shouldn’t have said there will be a lot of inflation. There are not any. Most of what he said was based on wild guesswork and wishful thinking. It’s not what you expect from the Chief Economist, but what you can expect from a news program commentator.

Unlike the Fed, the BoE does not have an open-ended QE program, but has set itself the target of increasing its holdings of UK government bonds to £ 875 billion and its holdings of corporate bonds. to £ 20bn, for a combined target of £ 895bn. And like the Bank of Canada, it has already started to gradually reduce its bond purchases, from £ 4.4bn per week to £ 3.4bn per week.

This stimulus, combined with a host of other factors – including low inventories, supply chain shocks, rising shipping costs, growing demand for certain commodities and consumer goods in developed economies – fuels inflation. Unlike most of his BoE colleagues, Haldane believes that inflation, now that it has arrived, is unlikely to be transient:

“[Inflation] begins to manifest itself in the price of output – the wholesale prices of companies charge each other, ”he said. “We anticipate some impact of these cost pressures later in the year; this is why we expect inflation to accelerate, first around the target (2%) at the end of the summer, then a little above the target by the end of the year. ‘year. The question is: will these higher prices stay?

“It’s on this particular point that I have a somewhat different perspective than some of the other members of the committee,” he said. “I think there is a better chance that companies will take advantage of what will then be a strong enough economy, exceeding its pre-covid activity levels, to take advantage of the opportunity to recoup their margins, to drive up price. This can then spill over into the wages demanded by workers as title pressures intensify. “

Haldane admits he could be wrong: “This is only a judgment,” he says, “based on the extent of the pipeline of cost pressures – and how that will spill over into prices at the end of the line. consumption.”

But given that the balance of risk has now shifted, as the economy recovers at the real pace, the focus should now be on the Bank of England’s primary focus as a central bank targeting the inflation, that is, inflation, he said, adding:

“Of all the things we want to avoid at the moment, a surprise upside for inflation is among the most important, as it would come at the cost of having to tighten policy even faster or on a more significant scale,” or maybe both, in a way that would take away the legs on the restart. By Nick Corbishley, for WOLF STREET.

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