MPC prepared to overlook "period of above-target inflation"

Bank of England dashes hopes of the inflation hawks.

The Bank of England's monthly inflation report confirms that its Monetary Policy Committee is heeding the advice of incoming governor Mark Carney and accepting an "overshoot" of inflation.

Speaking to MPs last week, Carney had confirmed he favoured a flexible inflation target. While he isn't convinced scrapping the target entirely "is a risk worth taking", he stated that he accepts the need for a bit of lee-way on the price target while growth is still below trend.

Today's report from the MPC backs up that argument. The Bank writes:

As long as domestic cost and price pressures remained consistent with inflation returning to the target in the medium term, it was appropriate to look through the temporary, albeit protracted, period of above-target inflation.

Attempting to bring inflation back to the target sooner by removing the current policy stimulus more quickly than currently anticipated by financial markets would risk derailing the recovery and undershooting the inflation target in the medium term.

The MPC’s remit is to deliver price stability, but to do so in a way that avoids undesirable volatility in output.

The key reason for the bank's decision is that it doesn't see GDP increasing quick enough, soon enough, to clamp down on inflation in a way which may damage growth. It predicts GDP returning to positive annual increases, but only reaching 2 per cent annual growth — the barest which could be described as acceptable — in the second quarter of 2014. It also sees a high possibility, although still below 50 per cent, of a contraction in the second quarter of 2013:

As a result, the loosening of the inflation target sans that the bank now doesn't see the rate returning to its two per cent target until 2015:

The news sent the pound down against all major currencies:

But the greater tolerance of inflation only goes so far. The MPC gave no indication that it was inclined to increase quantitative easing, typically seen as a trade-off between growth and inflation in a demand-constrained economy. Whether that means the MPC thinks demand is no longer constrained, or whether its tolerance has limits, remains unclear.

Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Ukip's Nigel Farage and Paul Nuttall. Photo: Getty
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Is the general election 2017 the end of Ukip?

Ukip led the way to Brexit, but now the party is on less than 10 per cent in the polls. 

Ukip could be finished. Ukip has only ever had two MPs, but it held an outside influence on politics: without it, we’d probably never have had the EU referendum. But Brexit has turned Ukip into a single-issue party without an issue. Ukip’s sole remaining MP, Douglas Carswell, left the party in March 2017, and told Sky News’ Adam Boulton that there was “no point” to the party anymore. 

Not everyone in Ukip has given up, though: Nigel Farage told Peston on Sunday that Ukip “will survive”, and current leader Paul Nuttall will be contesting a seat this year. But Ukip is standing in fewer constituencies than last time thanks to a shortage of both money and people. Who benefits if Ukip is finished? It’s likely to be the Tories. 

Is Ukip finished? 

What are Ukip's poll ratings?

Ukip’s poll ratings peaked in June 2016 at 16 per cent. Since the leave campaign’s success, that has steadily declined so that Ukip is going into the 2017 general election on 4 per cent, according to the latest polls. If the polls can be trusted, that’s a serious collapse.

Can Ukip get anymore MPs?

In the 2015 general election Ukip contested nearly every seat and got 13 per cent of the vote, making it the third biggest party (although is only returned one MP). Now Ukip is reportedly struggling to find candidates and could stand in as few as 100 seats. Ukip leader Paul Nuttall will stand in Boston and Skegness, but both ex-leader Nigel Farage and donor Arron Banks have ruled themselves out of running this time.

How many members does Ukip have?

Ukip’s membership declined from 45,994 at the 2015 general election to 39,000 in 2016. That’s a worrying sign for any political party, which relies on grassroots memberships to put in the campaigning legwork.

What does Ukip's decline mean for Labour and the Conservatives? 

The rise of Ukip took votes from both the Conservatives and Labour, with a nationalist message that appealed to disaffected voters from both right and left. But the decline of Ukip only seems to be helping the Conservatives. Stephen Bush has written about how in Wales voting Ukip seems to have been a gateway drug for traditional Labour voters who are now backing the mainstream right; so the voters Ukip took from the Conservatives are reverting to the Conservatives, and the ones they took from Labour are transferring to the Conservatives too.

Ukip might be finished as an electoral force, but its influence on the rest of British politics will be felt for many years yet. 

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