Moving the Goalposts

A short time after Mark Carney was announced as the replacement to Sir Mervyn King as the next governor of the Bank of England, Carney gave a speech suggesting he might like to move away from the 2% inflation target, and instead have the Bank focus on a GDP measure.

Roughly coincident with that, October saw a “surprise” jump in inflation to 2.7% which we have since learned was sustained into November as well. And given the recent rises in energy prices (most due to hit wallets in December) we can only expect that inflation will rise further before it starts to come down. Always assuming it does.

As we’ve commented ad nauseam already, this puts the Bank of England in a sticky position because economic growth remains stubbornly sluggish.

Whether that’s down to despicable Johnny Foreigner or despicable Tory pauper-beating (choose whichever suits your personal politics) is – in this context – fairly moot: whatever the cause it’s pretty much impossible for the Bank to address inflation directly by hiking rates when the overall economy remains depressed.

This is compounded by the recent Inflation Expectations survey of what Joe punter sees in real life. Released a week or so ago, this showed that compared to August (the last survey) there is the feeling that inflation is higher now, and will be higher in the next year, and in the year after that, and in 5 years time. Substantial increases too – 0.3%, 0.4% and 0.5% respectively.

In a way that’s the Bank’s worst fear materialising – give the relatively (surprisingly) strong jobs market, there’s a concern these expectations will feed into pay deals; embedding inflation rather than using the traditional line that it’s all down to external forces like despicable energy companies. If the Bank’s in a pickle, that just added extra gherkin.

I’ve argued for the best part of a year that if inflation remained high (I think I even suggested 2.7% at one point) the Bank would eventually be forced into taking action for fear of completely losing its credibility. To a degree the energy rises help their position (external forces again) but it really feels like time is running out.

Which is why Mr Carney’s proposition is so interesting. As one of my philosophy tutors once pointed out: if you don’t like the answers available, ask a different question. Shifting the target to a growth measure would allow the Bank to continue with further stimulus to push the economy on and, basically, let inflation go hang. In that world, inflation simply becomes the nasty stink you have to cope with while you’re cleaning up the mess.

So I’m afraid to say my radical-but-fun forecast of a rate rise around May is now looking dead in the water. Not that it was wrong you understand (heaven forbid), it’s just that the goalposts have been dismantled and are currently in transit to their new location.

Of course this isn’t Carney’s decision to make: the Bank of England’s remit is set by the Chancellor. But given George Osbourne reportedly spent some considerable time persuading him to take the job - after he’d publicly ruled himself out, remember - this is looking as close to a done deal as you’re going to get.


Call our expert
advisers now
Call free from mobile or landline
Open 7 days a week until 8pm weekdays