16th August 2012
Yesterday I attended a seminar at the Royal Statistical Society on the subject of adding house prices to the Consumer Price Index. This was slightly odd in that the impression was distinctly given that a decision had already been made (in favour of rental equivalence) which made me wonder if the word consultation was actually appropriate! However in the course of the discussion I asked what has changed?
The reason for this was that the CPI had been proposed in the UK in 2001/2 and introduced in 2003 and it is now 2012. The response was that adding a measure of housing costs was "always intended" to which I enquired if it always took ten years to do what they intended?!
However the conversation took a slightly different turn as the speakers added that a driver right now was that the current Chancellor of the Exchequer had asked for it. As one of the members of the Monetary Policy Committee Martin Weale was there I asked him if the MPC would therefore target such an index (CPI plus house prices or CPIH) and he replied yes. Whilst this was a reply to a specific question this left me rather uncomfortable as it had a generic feel to it that (almost) whatever the Chancellor asked for would be done.
The consequence for inflation targeting
In the seminar there was some discussion of inflation targeting and the concept of credibility was mentioned several times. To my mind this was already slightly unreal as of course in the real world the credibility of the UK's inflation targeting has been damaged, possibly fatally. But, in my opinion members of the MPC have to have their own idea of what is the correct inflation target, otherwise how can they have any faith and belief in what they are doing?
Later the conversation return to this topic as one of the speakers raised concerns about the introduction of CPI in the first place when it replaced the Retail Price Index. One issue here is plainly the fact that it invariably gives a lower number for inflation. Another is that CPI was designed for use as a macroeconomics tool rather than as a cost of living index. And, of course, we find that the current government is using it as a cost of living index for benefits uprating!
So I found myself considering this issue and it brings me to the policy of the MPC and the concept of independence. By this I mean intellectual independence where there have to be issues to which you would raise an objection and others over which you would resign. This needs some nuance as I would not resign just because the Chancellor suggested something! But that there would be issues over which I would and just for the avoidance of doubt I would have objected to the introduction of CPI if I had been on the MPC at the time. I remain somewhat amazed that nobody on the MPC at that time did.
How independent is the Bank of England?
The main two policies of the Bank of England were summarised in the latest minutes:
"Bank Rate should be maintained at 0.5%
The Bank of England should continue with the programme of asset purchases totalling £375 billion financed by the issuance of central bank reserves"
Even the strongest defender of the Bank of England would find it hard to argue that there are any signs of independence here. After all these are exactly the sort of policies that would make virtually any UK government smile! Interest rates slashed and their debt being supported by Bank of England purchases under Quantitative Easing would surely be on the vast majority of political Christmas wish-lists.
Indeed Bank of England policymakers are behaving like politicians
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