It is a monthly requirement to comment on the Office for National Statistics announcement on inflation. This is what they had to say:
There is a little nuance that could be noted.
Fur example, the price of goods is deflating, whilst the price of services is above the 2 per cent rate as, being labour based, these are still catching up with past inflation. This services rate will now be used by the Bank of an England as an excuse to keep interest rates very high, if they cut them at all. But the reality is that inflation has hit the target rate. The target rate was never sector based. It was the overall figure. Any excuse they made will be a sham to justify imposing misery.
And what they are really doing is apparent in the OOH graph. OOH stands for owner occupiers housing costs, which are, it will be noted, rising steadily. Why is that? I suggest that is very largely down to council tax, which is being pushed up by increasing financing costs, and mortgage related expenses. In other words, remaining pressure for higher wages are almost all down to the Bank of England and the high interest rates it sets.
No doubt they would argue otherwise, but then they are, as one of the Monetary Policy Committee's members has now admitted, intent on crushing people's well-being, so what they say cannot be trusted.
The reality is much of the remaining inflationary pressure in our economy has been created by the Bank of England, which is tasked with reducing it. You could not make this up.
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First, the BoE is charged with targeting CPI (not CPIH), which does not include housing costs, and is now “on target”
Second, Real Interest rates (the rate over and above expected inflation is in excess of 3% … which is quite restrictive.
Third, whilst base effects might point to rising CPI in coming months, it is (reasonably) predictable, not “self sustaining” and will be modest. (Eg. the transport YoY number rose from 0.4% to 0.7% last month mainly due to second hand car prices. At first glance one might assume that car prices rose but NO, they actually fell…… but not as fast as the fell in the corresponding month in 2023.)
So, the long and the short of is that rates should be lower.
However, the interplay between interest rates, wages, OOH, CPI/CPIH etc is complex and interesting. Well, interesting to me, at least. Some credit to ONS as they are now delivering experimental quarterly reports on housing costs… by sector (rent/mortgage etc) and income level.
Has the BoE thought about…..
If wage rises are entirely gobbled up by rising rent/mortgage costs (which, for many, they are), how inflationary are they? Sure, wages are an input cost for many products but there is no “wage/price spiral” because disposable income has not risen. Also, what about Health and Education? Those don’t have “prices” that are significant in the CPI basket. The money paid in mortgage interest and rent is largely a transfer to wealthier people that tend to save rather than spend, so that is not inflationary. Obsessing about wages makes no real sense.
A great deal to agree with
The problem is, that since CPI excludes housing, you would think the policy directive was deliberately designed to skewer mortgage holders; and secures the right of an independent BoE complacently to carry out dishing out the hurt with a dogged embellishment of self-righteousness.
What is a convincing case for this set of priorities, because it has long eluded me?
It has eluded you because there is no good reason.
ONS thinks CPIH is a better measure since it include housing costs. CPI is used because it is harmonised with other countries’ methodologies.
If we really want to have an inflation target could we target CPIH at 2.5% or 3%?
Every Government I have ever seen very carefully selects international comparative statistics with Byzantine impenetrability; typically to spin some dubiously contrived proof that Britain performs best. In fact Britain performs badly in most cases, if the spin is abandoned; and has Britain failed comparatively for a long time. Everybody can see it; whether they are prepared to concede the undeniable, or not. The British model of Government, business, and trade is a story of gross failure and inadequacy. It is the model that must go; and it is the model that the politicians, and perhaps even the FPTP electorate refuses to countenance. The consequences are inevitable, they are here; and they aren’t going anywhere with the politicians we have.
“If we really want to have an inflation target could we target CPIH at 2.5% or 3%?”
And the CPI use that allows the international comparison (at whatever cost to consumers), is with nations that do not have the British bias to home ownership. International comparisons are thus used by arbitrary adjustment of a single point (but in the case you give 0.5% or 1%?), with banal simplicity by cynical central bankers and politicians (I choose these words carefully), because the attempt opportunistically to use these comparisons (the intent is always to make British exceptionalism look smarter, however dumb it is), merely makes a complex and impenetrable nexus of inter-related variables, even more complex and impenetrable; but makes it look as if it is very simple to make the comparisons with one interest rate adjustment stand for a completely different economic culture, and a vast array of variables; all for Party political advantage. Let us call this drivel out, for what it is; rubbish.
It has seemed to me, for a long time, that ‘an inflation rate’ is meaningless. Different things have different rates of price increase and one size fits all does not work. That has been recognised, we have CPI, CPIH RPI and others. My particular interest is in the lowest paid and those on pensions/benefits. Currently increase in benefits is based on CPI. However those on benefits do not spend moey on many of the things included in the CPI ‘basket’. They nearly all spend most on rent, utilities, food. Some also spend on children’s clothing and transport. Their income level is so low that they have little ability to spend on anything else. That has caused an issue over the last couple of years, when rent, utilities and food inflation have all been much higher than CPI inflation. Resulting in an ever decreasing ability for those surviving on beenfits to actually survive.
Inflation rate indices are used for lots of purposes. Is it not time we had an index that reflects the needs of those on benefits?
CPIH would be closer for them, but still not weighted properly
The irony of all this is that it was a Labour politician, Gordon Brown, who skewered the vital need for government accountability by giving the Bank of England quasi autonomy. Now we no longer need the manipulation of treasury bonds to determine base rate this is done by manipulating the amount of interest paid on reserves held by private sector banks. This of course begs the question whether the country should be using base rate manipulation as a tool to regulate the economy. Certainly a core view of MMT is that interest rates on treasury bonds should be permanently held to near zero.
Why is all this important? The obvious current example is that round about £35 billion interest is being paid to commercial banks on the reserves they hold with the agreement presumably of the current Labour government whereas they are refusing to lift the two child benefit cap which would cost approximately £1.7 billion a year.
https://www.taxresearch.org.uk/Blog/2024/06/07/the-bank-of-england-should-not-be-paying-interest-on-the-money-the-government-gifted-to-our-commercial-banks/
https://www.theguardian.com/business/article/2024/jul/14/labour-should-scrap-two-child-benefit-cap-sooner-rather-than-later
All of this very strongly suggests that the UK is plagued by the problem that individuals are allowed to stand for Parliament without having the slightest idea how the country’s fiat monetary system works nor ought to work!
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4890683
Thank you and well said.
I don’t find it ironic.
The City, where I work, often prefers to have Labour do this sort of dirty work. The NHS is another example.
On Monday night, Reeves met the City at an event hosted by Blairite front Labour Together. She gave the City the heads up on today’s King’s speech, useful for trading later. In turn, the City made its views known, including on central bank reserve interests, employee protection, PFI etc. We peasants don’t get this sort of access and representation.
In many corrupt countries, the going rate to bribe a politician is about 10% of the value of the contract. This is why many politicians are called Mr 10%. However, British, especially Labour, politicians are cheap. A US tech giant, based at King’s Cross, spent about 10,000 pounds on Labour politicians and saved itself a potential tax bill if 3 billion.
Not sure I would say that near-zero government bond yields are “core to MMT”. Certainly, MMT shows they are possible…. but not essential.
Current rates are clearly too high but the period where government yields were close to zero did create problems. House price increases, pension fund solvency issues etc..
In general, low rates ARE a good thing as it reduces rentierism…… but the ability to use interest rate policy (along with other monetary measures (credit controls, min. reserve requirements etc.) as well as tax/spend policy is important.
@ Clive Parry. Well my MMT sources for keeping base rate low have been Randall Wray and Bill Mitchell but we need to go to Mosler and Forstater for the following clear statement on how a base rate is determined:-
“In a state money system with flexible exchange rates running a budget deficit—in
other words, under the “normal” conditions or operations of the specified institutional
context—without government intervention either to pay interest on reserves or to offer
securities to drain excess reserves to actively support a nonzero, positive interest rate, the
natural or normal rate of interest of such a system is zero.”
https://moslereconomics.com/wp-content/graphs/2009/07/natural-rate-is-zero.PDF
Clearly (especially in regard to the knock-on effects of house price inflation) credit controls should be used. Widespread corruption in the UK as Richard has pointed prevents either the sensible use of base rate manipulation or credit control as effective tools for regulating the UK economy.
Mmt does advocate zero real interest rates
I have no problem with that
I completely agree, if you run a deficit, don’t issue gilts and don’t pay interest on reserves then risk free interest rates would be zero. However, this would not necessarily be a good idea; MMT does not forbid the sale of gilts or paying interest on Reserves.
My take on MMT is that it is a statement of the way money works… and what is possible. It does not advocate what is desirable – that is left for politicians and other folk to debate.
I agree it should but say that
But this it a a pretty logical conclusion
“normal conditions”.
This is the real world. It is so complex we don’t understand how it really works. In plain words, what on earth are “normal conditions”. The standard statement of normality in economics is an abstraction; an ideal that doesn’t exist. Normal conditions, like perfect competition exists…. where nobody can even point to, because “normal conditions” do not exist; like Heraclitus’ river , the “conditions” are never the same. Economists and Central Bankers simplify this impossible predicament, not because they have an answer; but because they do not even know how to address either it, or the inadequacy of what they both claim and do (but the simplification is passed off as if they understand the complexity, and are simplifying for the baffled consumer; trust me, they are even more baffled than you).
Well it would seem to me to be an important issue for this blog (including help from its contributors) to help define what “conditions” should be taken into account and from this what regulator “tools” the UK government should use and whether it makes sense to have given “quasi-autonomy” to its own bank. This issue should not be evaded by statements that MMT founders got it wrong. As Keynes implied by his statement “if circumstances change I change my mind” and by “circumstances” one can of course include as an MMT founder you never did get all the joined-up thinking absolutely right in the first place. This has been argued this week on Richard’s blog in regard to the benefits of imports, for example!
How accurate has OBR ever been? Should Government be accountable for accepting results from GESG models that do not even include banks or money? GIGO should exclude OBR “advice”, surely?
Their record is dire