In an article in the Telegraph today Jeff Randall claims that the Bank of England is failing this country.
The case for the proposition?
- CPI hit 4.5% in April, and may well continue to rise
- Inflation has now been above target for 51 of the past 60 months
- Prices rising faster than pay means continued squeeze for households
These are all valid points. The Bank has indeed failed to keep inflation below target in the last few years. But that does not mean that it is failing the country now.
Changes in monetary policy can take up to two years to feed through to the economy. So for the Bank's policy setting, inflation at the moment is not as important as what inflation will be.
As Adam Posen has continued to argue, the MPC would “help no one in this economy by setting our policy to compensate for past mistakes rather than basing it on our best forecast”
True, the Bank's forecasting record in the last few years has been far from faultless, but it remains the case that the risks to inflation in the medium term are finely balanced.
We may yet see lower inflation, as recent and projected weak growth reduces price pressures.
Similarly, some of the risks to higher inflation may not materialise. Wage pressures are one of the biggest risks to inflation but so far labour market data from ONS last week, and EEF's own Pay Settlements data, out today, shows that although pay is rising, it is doing so slowly, at levels not associated with worrying inflationary pressure.