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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How did I, obsessed with non-places, not know about the Trafford Centre?

My wife had booked us all in to a showing of the latest Bond film at the IMAX Cinema at the Trafford Centre. “Why the Trafford Centre?” I taxed her. She looked at me as if I were a complete ass, but refused to enlighten me. 

Last year I bought a copy of J G Ballard’s last novel, Kingdom Come, a dystopic tale of the near future in which bored suburbanites descend into anomic violence as they retreat inside a giant shopping mall. Predictably, I bought my copy at the Bluewater shopping mall in north Kent, on the outskirts of London. Bluewater held the title of Britain’s biggest shopping mall for a number of years and it is surpassing large: a huge circular corridor that has become a destination. I asked a police officer where the Waterstones was and discovered she was a good old-fashioned bobby-on-the-beat – her beat having been, for seven years, to walk slowly around and around . . . Bluewater.

But I wasn’t fettered by Bluewater’s surly gravity, any more than I was galvanised by rampant consumerism. Novel purchased, I took a cab over the soaring Queen Elizabeth II Bridge to Essex, where I alighted at Bluewater’s twin establishment: the Lakeside shopping mall in West Thurrock. I headed for the Lakeside branch of Waterstones, where I . . . well, you guessed it: I returned my copy of Kingdom Come. This surreal little exercise was undertaken for the BBC Radio 4 documentary Malled: Sixty Years of Undercover Shopping, and I’ve detailed it here purely in order to illustrate this point: I have more than a passing interest in shopping malls.

This is why the events of a fortnight ago, when Family Self went up to Manchester for what is termed, I believe, a “city break”, seemed quite so bizarre. My wife had booked us all in to a showing of the latest Bond film at the IMAX Cinema at the Trafford Centre. “Why the Trafford Centre?” I taxed her. “It’s in Trafford, which is five miles from the city centre.” She looked at me as if I were a complete ass, but refused to enlighten me. My revelation came later, when we were wandering the rococo halls of the Trafford Centre, marvelling at the lashings of gold leaf applied to the serried columns as our soles slapped on the Italian marble flooring. My wife couldn’t believe that one such as I, obsessed by what the French philosopher Marc Augé has named “non-places”, didn’t know about the Trafford Centre.

But I didn’t – it was a 207,000-square-metre hole in my map of the world. I knew nothing of the bitter and protracted wrangling that attended its inception, as successive planning applications were rejected by ever higher authorities, until our Noble Lords had to step in to ensure future generations will be able to buy their schmutter at TK Maxx and then sip their lattes at Starbucks without having to brave the harsh Lancashire elements. Did I feel small as my savvier spouse led me through these storied halls? You bet your waddling, wobbling, standing-still-on-the-travelator bum I did. How could I not have known about the great central dome of the Trafford mall, which is bigger – and statelier – than that of St Paul’s? How could I have been unaware of the Orient, Europe’s largest food court, with its seating for 1,800 diners, served by a plethora of exciting outlets including Harry Ramsden’s, Carluccio’s and those piquant bun-pushers, McDonald’s?

Actually, the Orient completely bowled me over. The Trafford Centre’s imagineers point to the nearby Manchester Ship Canal as influencing this wholly novel and utterly weird space, which is formed by a sort of Möbius strip of 1930s ocean-liner design, being at once superstructure – railings, funnels, tables arranged to simulate the deckchairs on a sun deck – and interior. However, nothing like this ever cruised by Runcorn. Not that I object to this, any more than I objected to the cluttered corridor full of orientalism – noodle bars, sushi joints, all-you-can-eat Chinese barbecues – that debouched from it and led us back into the weirdly glistering main retail areas, with their ornamental griffins and neoclassical columns bodged up out of medium-density fibreboard.

The Trafford Centre’s imagineers also make great play of design features – such as the aforementioned griffins – that are meant to tie the humongous mall to its hinterland (these are the heraldic symbols of the de Traffords, who used to own hereabouts), and to the north-east’s proud industrial heritage. But this is all ornamental balls; the truth is that the Trafford Centre’s ambience is so sumptuously wacky, it could quite reasonably be twinned with Las Vegas.

While the rest of the family went in search of retail opportunities, I watched the Mancunians process. It occurred to me that if there were any influences at work here – besides the Baudrillardian ones of hyperreality and simulation that underpin so much of the contemporary built environment – it was the presence of a large British Asian community. The only people who didn’t look out of both place and time, wandering about among all the gilded pomp and crystalline circumstance, were women wearing saris, shalwar kameez and burqas. Tracksuit bottoms and hoodies just didn’t cut it – although, I concede, come the breakdown in civil society anticipated in Kingdom Come, this pseudo-sportswear will come into its own as the perfect pillaging outfit.

Next week: Lives of Others

Will Self is an author and journalist. His books include Umbrella, Shark, The Book of Dave and The Butt. He writes the Madness of Crowds and Real Meals columns for the New Statesman.

This article first appeared in the 26 November 2015 issue of the New Statesman, Terror vs the State