The MPC has lost the plot again . . .

This time on inflation.

The Monetary Policy Committee (MPC) appears to have lost the plot. It seems to have given up on targeting inflation. The likelihood is that, because of the committee's lack of action, the UK economy may well experience a bout of deflation that will be hard for the economy to recover from. This is a very big worry.

Its job is to target the CPI in the medium term. Specifically it is supposed to aim to get the CPI back to target two years ahead. Its normal policy trigger is to adjust interest rates up or down. Interest rates are at 0.5 per cent now and can't really go any lower. Hence, the MPC has been increasing the amount of money in existence by quantitative easing. Up to this point, it has injected just over £200bn of new money into the UK economy.

Today it issued its Inflation Report with its forecast for inflation and growth. The growth forecast is much more optimistic than those of other forecasters such as the National Institute of Economic and Social Research. But the inflation forecast is more interesting.

Below are two fan charts from the report which show the range of the forecast. The fan widens as time moves forward, as it is harder to forecast further into the future. For those who are technically minded, this is the 90 per cent confidence interval rather than the single line that most other forecasters produce, and suggests what the MPC sees as its range of error.

 

CPI inflation

 

The first chart (5.4) is the forecast produced today and the second (5.5) is the one produced in November 2009. It is clear that the central forecast for inflation -- the darkest part of the fans -- is lower two years out than it was in November. The vertical dotted line is the outcome that the MPC, by statute, focuses on, because its job is to target inflation a couple of years in the future. It can't do anything to influence the inflation rate next week or the week after. Changes in interest rates, and changes in quantitative easing, take some time to work through the economy.

Inflation is going to jump over the next few months, primarily because of the rise in petrol prices and the increase in VAT from 15 per cent to 17.5 per cent. Indeed, the likelihood is that the committee will have to write a letter to the Chancellor, Alistair Darling, explaining why inflation is above target. They will just say: "Don't worry, it will fall back down very quickly."

 

CPI inflation 2

 

But the big concern is that inflation is below the target two years out, according to the MPC's forecast. The implication of this is that the Bank of England either should have been cutting interest rates further by a lot, which it can't, or it should have been doing more quantitative easing. Another possibility is that the pound would have to fall further, which may be something the MPC is targeting.

And the committee's forecast for growth is incredibly optimistic. It is much more optimistic than I think is reasonable, and also more optimistic than the recent projections from the NIESR. If output turns out to be lower than the MPC forecast, then inflation will be even lower. The likelihood is that before two years are up, even based on this forecast, the committee will have to write a letter to the Chancellor explaining why inflation is below the target!

The MPC conditions its forecast on market interest rates, which have fallen since November, so that should imply more inflation, not less, as such a change is stimulative. The MPC doesn't forecast these rates in its report but just accepts what the markets predict they will be. Worryingly, even when the assumption is made that interest rates will remain at 0.5 per cent across the forecast horizon, inflation never hits the target. It did hit the target in November using this assumption. So the implication is that the future will be more disinflationary than the MPC thought in the past.

The implication of this latest inflation forecast is that the MPC needs to put more stimulus into the market. In normal times, I would be voting for a big cut in rates, perhaps as big as 150 basis points. These days I would also be voting for lots more QE -- and sensible members of the MPC such as David Miles probably did that. An alternative would be to see the exchange rate fall in the wake of this news -- which it already has this morning -- and for gilts to rise, which they also have done this morning. It is now clear that interest rates are not going to rise any time soon, and so the expectation is that the yield curve will fall further.

As each week goes by, I am becoming more and more convinced that this MPC is not fit for purpose. The Inflation Report published today was another nail in its coffin.

David ("Danny") Blanchflower is Bruce V Rauner Professor of Economics at Dartmouth College, New Hampshire, and professor of economics at the University of Stirling. He is a former member of the Monetary Policy Committee. His economics column appears weekly in the New Statesman.

David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire

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Metro mayors can help Labour return to government

Labour champions in the new city regions can help their party at the national level too.

2017 will mark the inaugural elections of directly-elected metro mayors across England. In all cases, these mayor and cabinet combined authorities are situated in Labour heartlands, and as such Labour should look confidently at winning the whole slate.

Beyond the good press winning again will generate, these offices provide an avenue for Labour to showcase good governance, and imperatively, provide vocal opposition to the constraints of local government by Tory cuts.

The introduction of the Mayor of London in 2000 has provided a blueprint for how the media can provide a platform for media-friendly leadership. It has also demonstrated the ease that the office allows for attribution of successes to that individual and party – or misappropriated in context of Boris Bikes and to a lesser extent the London Olympics.

While without the same extent of the powers of the sui generis mayor of the capital, the prospect of additional metro-mayors provide an opportunity for replicating these successes while providing experience for Labour big-hitters to develop themselves in government. This opportunity hasn’t gone unnoticed, and after Sadiq Khan’s victory in London has shown that the role can grow beyond the limitations – perceived or otherwise - of the Corbyn shadow cabinet while strengthening team Labour’s credibility by actually being in power.

Shadow Health Secretary and former leadership candidate Andy Burnham’s announcement last week for Greater Manchester was the first big hitter to make his intention known. The rising star of Luciana Berger, another member of Labour’s health team, is known to be considering a run in the Liverpool City Region. Could we also see them joined by the juggernaut of Liam Byrne in the West Midlands, or next-generation Catherine McKinnell in the North East?

If we can get a pantheon of champions elected across these city regions, to what extent can this have an influence on national elections? These new metro areas represent around 11.5 million people, rising to over 20 million if you include Sadiq’s Greater London. While no doubt that is an impressive audience that our Labour pantheon are able to demonstrate leadership to, there are limitations. 80 of the 94 existing Westminster seats who are covered under the jurisdiction of the new metro-mayors are already Labour seats. While imperative to solidify our current base for any potential further electoral decline, in order to maximise the impact that this team can have on Labour’s resurgence there needs to be visibility beyond residents.

The impact of business is one example where such influence can be extended. Andy Burnham for example has outlined his case to make Greater Manchester the creative capital of the UK. According to the ONS about 150,000 people commute into Greater Manchester, which is two constituency’s worth of people that can be directly influenced by the Mayor of Greater Manchester.

Despite these calculations and similar ones that can be made in other city-regions, the real opportunity with selecting the right Labour candidates is the media impact these champion mayors can make on the national debate. This projects the influence from the relatively-safe Labour regions across the country. This is particularly important to press the blame of any tightening of belts in local fiscal policy on the national Tory government’s cuts. We need individuals who have characteristics of cabinet-level experience, inspiring leadership, high profile campaigning experience and tough talking opposition credentials to support the national party leadership put the Tory’s on the narrative back foot.

That is not to say there are not fine local council leaders and technocrats who’s experience and governance experience at vital to Labour producing local successes. But the media don’t really care who number two is, and these individuals are best serving the national agenda for the party if they support A-listers who can shine a bright spotlight on our successes and Tory mismanagement.

If Jeremy Corbyn and the party are able to topple the Conservatives come next election, then all the better that we have a diverse team playing their part both on the front bench and in the pantheon of metro-mayors. If despite our best efforts Jeremy’s leadership falls short, then we will have experienced leaders in waiting who have been able to afford some distance from the front-bench, untainted and able to take the party’s plan B forward.