Today’s latest inflation figures confirmed what many people already knew: the cost of living is still rising at a faster pace than the Bank of England’s 2% target. CPI inflation may have eased back to 2.4% in the twelve months to April, but it has now been above target since November 2009. The broader RPI measure of inflation – albeit complete with calculation problems – was 2.9% last month, probably closer to most people’s informal assessment. Both measures are likely to rise again in the months ahead. But in many ways the UK still looks like an outsider on the inflation front.
In the euro area, headline inflation fell to just 1.2% in April – definitely below the European Central Bank’s target of ‘below, but close to, 2%’. In the US, the harmonised measure of CPI inflation for the total US population was negative in April, indicating outright (if probably temporary) deflation. The Federal Reserve’s preferred inflation measure – the core deflator used to convert nominal spending into a ‘real’ estimate – was also low at just 1.1% in March. Even in Japan, where the equity market has soared and the yen has lost value since the new Governor took over at the Bank of Japan, the plan to get inflation up to 2% within two years is regarded as challenging by most economists and wildly optimistic by some. Among advanced economies, the UK stands out as something of an exception.
There are two key messages we should take from this. First, massive expansion of central bank balance sheets does not necessarily imply high consumer price inflation. To be honest, anyone who had looked at Japan in the past twenty years should already have known this. But we have pretty conclusive proof for the US and Europe as well now. And while there are concerns that central bank liquidity has pushed up asset prices, I sometimes think these miss the point: part of the stated goal of quantitative easing (QE) was, you guessed it, to push up asset prices. I have yet to see any credible analysis that decisively identifies how much QE has over-inflated asset markets, above and beyond what central bankers were hoping for. Yes, there are risks – but the risks are primarily of deflationary pressures arising from unexpected sharp falls in asset prices, not runaway consumer price inflation.
The second message is that the UK has been hit by a whole range of relative price shocks in recent years. The hikes in VAT and other duties at the start of the parliament, together with the lower value of sterling, higher energy bills andÂ other unexpected jumps have served to keep UK inflation higher than in other advanced economies. But it’s not really due to QE per se, as otherwise inflation in the US (let alone Japan) would have been much higher than we’ve actually seen. At the same time, concerns about UK inflation becoming ingrained – as pushed by a study this week, albeit a deeply unconvincing one – also look overblown. This is for the simple reason that, if inflation really was getting ‘stuck’ in the national psyche, wages and earnings would be rising much faster than the tiny growth rates we currently observe. If anything, it might suggest that a case could be made for boosting competition in various sectors of the economy; but persistently above-target inflation does not look to be a genuinely long-run phenomenon that will still be here in another four years even if wages and global commodity prices stay flat.
None of this will help those people struggling to pay the bills, of course. But on the issue of monetary policy and inflation, the UK experience is atypical – more than five years into the crisis, all the signs are that central banks around the world could do even more without really pushing inflation through the roof like we saw in the 1970s. Whether Mr Carney will be brave enough to do so, given the UK’s unique experience, remains to be seen.