It is a monthly requirement to comment on the Office for National Statistics announcement on inflation. This is what they had to say:
There is a little nuance that could be noted.
Fur example, the price of goods is deflating, whilst the price of services is above the 2 per cent rate as, being labour based, these are still catching up with past inflation. This services rate will now be used by the Bank of an England as an excuse to keep interest rates very high, if they cut them at all. But the reality is that inflation has hit the target rate. The target rate was never sector based. It was the overall figure. Any excuse they made will be a sham to justify imposing misery.
And what they are really doing is apparent in the OOH graph. OOH stands for owner occupiers housing costs, which are, it will be noted, rising steadily. Why is that? I suggest that is very largely down to council tax, which is being pushed up by increasing financing costs, and mortgage related expenses. In other words, remaining pressure for higher wages are almost all down to the Bank of England and the high interest rates it sets.
No doubt they would argue otherwise, but then they are, as one of the Monetary Policy Committee's members has now admitted, intent on crushing people's well-being, so what they say cannot be trusted.
The reality is much of the remaining inflationary pressure in our economy has been created by the Bank of England, which is tasked with reducing it. You could not make this up.
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First, the BoE is charged with targeting CPI (not CPIH), which does not include housing costs, and is now “on target”
Second, Real Interest rates (the rate over and above expected inflation is in excess of 3% … which is quite restrictive.
Third, whilst base effects might point to rising CPI in coming months, it is (reasonably) predictable, not “self sustaining” and will be modest. (Eg. the transport YoY number rose from 0.4% to 0.7% last month mainly due to second hand car prices. At first glance one might assume that car prices rose but NO, they actually fell…… but not as fast as the fell in the corresponding month in 2023.)
So, the long and the short of is that rates should be lower.
However, the interplay between interest rates, wages, OOH, CPI/CPIH etc is complex and interesting. Well, interesting to me, at least. Some credit to ONS as they are now delivering experimental quarterly reports on housing costs… by sector (rent/mortgage etc) and income level.
Has the BoE thought about…..
If wage rises are entirely gobbled up by rising rent/mortgage costs (which, for many, they are), how inflationary are they? Sure, wages are an input cost for many products but there is no “wage/price spiral” because disposable income has not risen. Also, what about Health and Education? Those don’t have “prices” that are significant in the CPI basket. The money paid in mortgage interest and rent is largely a transfer to wealthier people that tend to save rather than spend, so that is not inflationary. Obsessing about wages makes no real sense.
A great deal to agree with
The problem is, that since CPI excludes housing, you would think the policy directive was deliberately designed to skewer mortgage holders; and secures the right of an independent BoE complacently to carry out dishing out the hurt with a dogged embellishment of self-righteousness.
What is a convincing case for this set of priorities, because it has long eluded me?
The irony of all this is that it was a Labour politician, Gordon Brown, who skewered the vital need for government accountability by giving the Bank of England quasi autonomy. Now we no longer need the manipulation of treasury bonds to determine base rate this is done by manipulating the amount of interest paid on reserves held by private sector banks. This of course begs the question whether the country should be using base rate manipulation as a tool to regulate the economy. Certainly a core view of MMT is that interest rates on treasury bonds should be permanently held to near zero.
Why is all this important? The obvious current example is that round about £35 billion interest is being paid to commercial banks on the reserves they hold with the agreement presumably of the current Labour government whereas they are refusing to lift the two child benefit cap which would cost approximately £1.7 billion a year.
https://www.taxresearch.org.uk/Blog/2024/06/07/the-bank-of-england-should-not-be-paying-interest-on-the-money-the-government-gifted-to-our-commercial-banks/
https://www.theguardian.com/business/article/2024/jul/14/labour-should-scrap-two-child-benefit-cap-sooner-rather-than-later
All of this very strongly suggests that the UK is plagued by the problem that individuals are allowed to stand for Parliament without having the slightest idea how the country’s fiat monetary system works nor ought to work!
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4890683