{"id":3146,"date":"2010-11-10T12:58:55","date_gmt":"2010-11-10T12:58:55","guid":{"rendered":"https:\/\/mmm.9dotdigital.ca\/?p=3146"},"modified":"2025-03-27T15:49:11","modified_gmt":"2025-03-27T15:49:11","slug":"uk-inflation-report-signals-mpc-stalemate","status":"publish","type":"post","link":"https:\/\/mmm.9dotdigital.ca\/?p=3146","title":{"rendered":"UK Inflation Report signals MPC stalemate"},"content":{"rendered":"<p>The November <em>Inflation Report<\/em> suggests that the MPC is badly split and unlikely to be able to muster a majority for action &ndash; in either direction &ndash; for the foreseeable future. In a now-familiar routine, the Bank has been forced to raise its near-term inflation forecast significantly but continues to project an eventual decline to the 2% target, based on a &ldquo;neo-Keynesian&rdquo; model emphasising the &ldquo;output gap&rdquo; and fiscal tightening. The alternative &ldquo;monetarist&rdquo; view that persistent inflation overshoots reflect an excess of the supply of money over the demand to hold it &ndash; with demand depressed by the Bank&rsquo;s imposition of negative real interest rates &ndash; is ignored.<\/p>\n<p>Observations:<\/p>\n<ul>\n<li>\n<p>The MPC&#8217;s bias is summarised by its mean forecast for inflation in two years&#8217; time based on unchanged policies &ndash; a sub-target figure signals an inclination to ease and vice versa. The forecast was 2.0% in August and looks unchanged in November, based on the fan chart (the Bank refuses to publish the numbers until a week after the <em>Report<\/em>). So policy remains stuck in neutral despite recent upside growth and inflation surprises. (The gilt market, bizarrely, was discounting a shift to an easing bias, judging from today&#8217;s sell-off.)<\/p>\n<\/li>\n<li>\n<p>CPI inflation is now expected to rise further to about 3.5% in the first quarter of 2011 compared with a forecast of 3.0% in the August <em>Report<\/em>, reflecting commodity price gains and a weaker exchange rate. It remains at or above the 3.1% letter-writing threshold until late 2011, implying that Governor King will have to wheel out his &#8220;temporary shocks&#8221; argument in at least four further missives to the Chancellor (including one next week following the October CPI report).<\/p>\n<\/li>\n<li>\n<p>The 3.5% first-quarter forecast is above consensus but probably still too low &ndash; a previous <a href=\"http:\/\/www.moneymovesmarkets.com\/journal\/2010\/11\/3\/uk-inflation-about-to-surge.html\">post<\/a> suggested a rise to about 4% by early 2011 based on high VAT pass-through and transmission of recent food and energy commodity price increases.<\/p>\n<\/li>\n<li>\n<p>The GDP growth forecast looks little changed from August, implying a mean expectation for 2011 expansion of about 2.5% compared with the OBR&#8217;s 2.3% assumption, i.e. not materially different. Claims that the Bank is significantly more optimistic based on its modal forecast are wrong, ignoring a downward risk skew. The OBR is hardly a fount of wisdom, with its June projection of 1.2% growth in 2010 far below a likely outturn of 1.8%.<\/p>\n<\/li>\n<li>\n<p>In a press conference reply, Governor King claimed that the MPC is required to set policy to achieve 2% inflation in two or three years&#8217; time but the remit states that the target applies &#8220;at all times&#8221; and makes no reference to the exclusion of &#8220;temporary shocks&#8221;. The November <em>Report<\/em> mean forecast implies that consumer prices will rise by more than 2.5% per annum over the coming two years.<\/p>\n<\/li>\n<li>\n<p>The September level of the CPI was 3.2% higher than if the Bank had achieved 2% inflation since the target was switched from RPIX in December 2003. The Bank&#8217;s forecast implies that this overshoot will increase further, to about 4.5% by the end of 2012.\ufeff Has inflation targeting become meaningless?<\/p>\n<\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>The November Inflation Report suggests that the MPC is badly split and unlikely to be able to muster a majority for action &ndash; in either direction &ndash; for the foreseeable future. In a now-familiar routine, the Bank has been forced to raise its near-term inflation forecast significantly but continues to project an eventual decline to [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3],"tags":[],"class_list":["post-3146","post","type-post","status-publish","format-standard","hentry","category-money-moves-markets"],"_links":{"self":[{"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts\/3146","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=3146"}],"version-history":[{"count":1,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts\/3146\/revisions"}],"predecessor-version":[{"id":5455,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts\/3146\/revisions\/5455"}],"wp:attachment":[{"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=3146"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=3146"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=3146"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}