Readers with a long memory will recall that Lord Patel wrote to Lord King at the Bank of England on Friday January 4th 2008.
Lord King Chairman of the Bank of England. Speech at the Mansion House 16th June 2007...
"Our central view remains that inflation will fall back this year as the rises in domestic gas and electricity prices last year drop out of the annual comparison, and the recent cuts in prices feed through to household bills."
… that your staff are inadequate readers of the energy market, in relation to the npower announcements today. (They anounced massive rise of 17.2 % in domestic energy prices - which have been followed by others, E.ON followed suit yesterday)
Can someone explain how the consistent and constant rise in global and especially EU energy costs had been ignored / overlooked when Lord King made his speech ?
Regards Lord Patel
PS An early response would be welcome.
Well, mindful of the final request, an answer has plonked into our e-mail in tray this afternoon.
From: Enquiries [mailto:Enquiries@bankofengland.co.uk]
Sent: Friday, February 08, 2008 9:56 AM
Dear Lord Patel
Thank you for your e-mail of 4 January concerning the Governor’s comments about energy prices and inflation. Your e-mail has been passed to me to reply on the Governor’s behalf.
Before turning to address your particular points, I thought that it was worth explaining the remit of the Monetary Policy Committee (MPC). The MPC’s task is to set interest rates to meet the Government’s inflation target of 2% (as measured by the 12-month increase in the Consumer Prices Index). Only by keeping inflation low can we avoid the cycles of high inflation, high interest rates and recession which characterised previous decades. In setting the official Bank Rate, the MPC has to judge the outlook for the economy and inflation, and to decide what level of interest rates will ensure inflation remains low and in line with the target of 2%. MPC decisions involve difficult judgements about the direction of the economy, the state of overall demand and the pressure on prices. There is inevitable uncertainty about the future. (You don't say !)At any time, there will be some factors that may in themselves point to higher interest rates, while others suggest lower rates, or no change. ( Without enumerating or identifying these factors present in mid-2007)
In reaching decisions, each of the 9 members of the MPC votes independently on Bank Rate, having considered all of the available evidence. You should note it takes around two years for changes in interest rates to work through fully to inflation, and so MPC decisions are based on the Committee’s expectations of inflation, and not on the current rate of CPI inflation. (So, if true, evidently they did not expect any inflationary pressures)
As the Governor indicated the energy price rises seen in 2006 did indeed drop out of the annual inflation comparison in the second half of 2007. In fact, in the first half of 2007 CPI inflation averaged 2.7%, whereas in the second half of the year CPI inflation averaged 2.0%. (Taking no account it appears of rapidly rising costs of gas, oil and electricity in the EU - and the fact that it was only months since the last energy price rises)
There have of course been further energy price rises since the speech to which you refer and the Governor has already addressed these matters in a speech he gave on 22 January this year. In particular he said “2008 is likely to see higher energy prices, higher food prices and, with a lower exchange rate, higher import prices, pushing inflation above the 2% target. It is possible that inflation could rise to the level at which I would need to write an open letter of explanation, possibly more than one, to the Chancellor. Although there is little we can do now to avoid some rise in inflation this year, the task of the Monetary Policy Committee is to ensure that it is short-lived. If inflation expectations were to pick up in the wake of a rise in inflation this year, then only a more prolonged slowdown would allow inflation to return to target. But if the rise in inflation does not affect longer-term expectations, then inflation could start to fall back towards the end of the year. We are determined to keep inflation on track to meet the 2% target in the medium term.”
Thank you once again for writing to the Bank. You might like to know that the Governor is made aware of all correspondence addressed to him along with the points that correspondents make.
Kind regards, Roger Beaton, Public Information & Enquiries Group, Bank of England, Treadneedle Street, London, EC2R 8AH T: 44 (0)20 7601 4878 F: 44 (0)20 7601 5460 E: email@example.com
Which seems to somehow not address the point about the BOE and it's double first encrusted staff of economists, econometricians, statisticians, modellers etc., managed to deal with the question how the, " consistent and constant rise in global and especially EU energy costs had been ignored / overlooked ".
Naturally Lord Patel has not only asked for an elaboration on this point, more specifically as to the need to forecast events rather than react to them retro-actively. He has, naturally ( and with all the modesty his rank alloes) offered not only to provide a forecasting service and also explained that he would be happy to accept an invitation to sit on the Monetary Policy Committee.
Anyone who thinks that would be a good idea, might wish to suggest the same to Mr Roger Beaton, who will no doubt deal with your correspondence with his customary promptness, courtesy and care.
The picture is of Lord Mervyn King speaking at the Mansion House on June 21st 2006 ( a year earlier) which was memorable for him pledging his support for the Trident missile program upgrade whith an estimated capital cost of £15 to £20 Bn.£65 Bn - less than the amount he , the PM and Chnacellor pissed up against the wall in one weekend in September throwing money at the Northern Wreck black hole - now we learn to be writtten into the National Accounts at a mind blowing, jaw sagging, eye watering capital cost of £100 Bn. That is (only one of the many) the reason why we call him a cunt. He is now a fixture for the next 5 years.
If you work at the Bank of England this handy graph of UK energy costs may act as a handy aide memoire or cut out 'n' keep crib sheet how prices have been moving.....
When Lord Patel attends his first meeting of the MPC he will hand out shiny waterproof encapsulated copies to the remaining members.
To see how food prices had been soaring the BOE might usefully read Lord Patel's post Wednesday, November 01, 2006 World wheat shortages loom - prices soar and the point made 8 months before Lord King's speech to the City in June 2007, that ... Wheat prices ricochet through the food supply chain -
1. Higher prices for cereal and breads eaten directly by humans
2. Higher prices for milk and meat produced from livestock fed a grain-based diet
3. Changes to the economics of using grain as feedstock to ethanol
Now you don't need a double first in PPE to understand that.