The Bank of England’s quarterly Inflation Report is a beautifully produced document. Its quality of presentation oozes confidence. It’s only when you look carefully or, worse still, look at past projections, that the value of its forecasts becomes apparent. This time, for example, it believes there is a 90% chance that inflation will be between -0.5% and 4.5% by the end of next year. This projection, the result of the best data going through the finest minds in the Bank, is effectively an admission that they haven’t a clue, and is quite worthless.

Nobody doubts that the Governor is doing his best, but his remark that “inflation has already fallen half way back towards the 2% target” is pretty desperate stuff. Overlay the “river of blood” on p8 of the report on previous projections of the course of inflation, and it’s clear just how wrong the Bank has been. If it was merely inaccurate, it would matter less, but the error is consistently to underestimate the persistence of inflation. Even now, with the VAT rise and ther worst of the oil price jump falling out of the 12-month index, it requires a leap of faith that our inflation-wracked economy is going to settle down at 2% a year.

As has been clear for many quarters now, the Bank’s MPC has drifted far away from its remit. It has judged the cost, in yet more unemployment and even less growth, of bringing inflation down to the target too high to bear. Near-zero Bank Rate and buying-in of one-third of Britain’s National Debt is the result. The only way out is sustainable growth, since we know the result of the unsustainable kind stimulated by the last government.

Sir Mervyn King wisely keeps his thoughts to himself on this subject. Those who need not include Andrew Smithers, whose cold and practised eye points to the cash being hoarded by corporates, now 6% of GDP. It must be used, either in falling profit margins or investment. The UK has much the lowest level of business investment among the G5 countries, and he blames the bonus culture for economic as well as social ills, since it encourages managements to raise prices rather than invest. He recommends measures to stimulate competition in banking, where “finance margins are huge and the industry invests little“, and almost anything that would bring down sterling’s exchange rate. As he concludes: “ We have low expectations for improved policy and thus fear continued stagnation. Our mild hopes rest on a fall in sterling.” Sir Mervyn might secretly agree. 

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