The Governor of the Bank of England Andrew Bailey warned this week of "Inflation Alarmism".
Prices are on the rise. House prices increased by over 11%. Haribo deliveries are failing, for a lack of lorry drivers. Construction costs are rising at the "drop of a hat". Quoted prices are good for just 24 hours. A shortage of materials is compounding pricing dilemmas in the building industry.
Andy Haldane the outgoing and departing Chief Economist at tthe Bank of England warned this week, inflation could hit 4% before the end of the year. He believes the Bank of England is not doing enough to control inflation. A "higher inflation narrative could become the dominant theme." Left too late, monetary policy would have to play catch up with larger and faster interest rate increases than would otherwise be the case. "Everyone would lose" if the Bank has to execute a "handbrake turn" he said.
Haldane was delivering his Swan Song Speech to the Institute for Government this week. He always delivers great speeches. The "Dog and The Frisbee" a particular favourite. Given at the Federal Reserve Bank of Kansas City's 36th Economic Policy Symposium at Jackson Hole Wyoming in 2012. The theme was "The Changing Policy Landscape".
The Chief Economist explained, to the assembled gathering, "catching a frisbee is difficult", yet a dog can master the technique. Indeed some dogs like border collies are better at frisbee catching than humans. Consider frisbee catching as an optimal control problem, the important thing is to keep your eye on the frisbee.
So it is with policy making, the important thing is to keep your eye on the frisbee and the policy objective. Haldane had called for a reduction in the planned rate of asset purchases at the last two MPC meetings.
The Governor hit back by the end of the week. Warning of alarmism, he said, "It is important not to overreact to rising prices and risk killing off the recovery. The rise in prices is likely to be temporary. Inflation is everywhere and always a temporary phenomenon, he might have added.
Lumber prices in the US have fallen back from over 50% at peak. Copper prices are some 10% off the year high. The economy is bouncing back but the "Output Gap", (who can remember the output gap), the output gap remains some 10% off trend growth. At the end of May some 2.4 million in the UK were still on furlough.
Trapped on Planet ZIRP, the Bank cannot reduce the level of gilt purchases until the demands of the DMO can be met by the capacity of independent financial institutions. Rate hikes on the Planet have led to more than one flight cancellation in the past. For now the Bank must keep eyes on the frisbee. It is right not to take a bite.
We expect inflation CPI basis to rise to over 3% and soon before easing towards a 2.5% by the end of the year. What happens next for oil prices remains key ... we expect oil prices Brent Crude to fall below $70 dollars in the Summer months. Rising Oil Prices could kill off recovery ... executing a process of demand destruction and raising fears of rising inflation ...
The Saturday Economist
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