Well, it was only a matter of time, really.
Central banks’ credibility has been eroding bit by bit for a while now, but the first evidence that the public’s expectations about inflation are disconnecting from those of the policymakers emerged on Thursday.
This, incidentally, is the same day that the Bank of England again found more pretexts to keep interest rates at a record low.
The development may go unnoticed, but it signals a shift in public attitudes that could have potentially serious consequences for the central bank.
Remember what I wrote more than a year ago about the need to include asset price inflation in the official inflation figures that the Bank of England targets, otherwise they’re meaningless?
It turns out it wasn’t just a bee in my bonnet. On the day of the Bank of England’s dovish releases and news conference, Londoners were forced to walk home for miles or spend hours queuing for buses because of the tube drivers’ strike.
The tube workers’ request? To link wage rises to house price inflation. Yup, you read it well. City AM reports that a leaflet of the tube drivers’ union, RMT, says this: “We want a flat-rate increase for staff that keeps pace with increasing living costs, such as rent and house prices.”
A RMT spokesman told the paper that the trade union was using the Royal Institution of Chartered Surveyors’ (RICS) forecasts for home prices as a benchmark.
Meanwhile, the Bank of England keeps dreaming about zero inflation and talks about “good deflation.”
In Thursday’s meeting, only one of the nine members of the Monetary Policy Committee voted for an increase in the interest rate – despite lower unemployment, rising wages and galloping house prices.
In his news conference, Bank of England Governor Mark Carney said: “The likely timing of first bank rate increase is drawing closer, however the exact timing…cannot be predicted in advance. It will be data dependent.”
But he didn’t specify which data. Let’s not forget that two years ago, after mentioning the 7% unemployment rate as a benchmark for when the central bank will start to consider raising the interest rate, Carney dropped the benchmark when the rate went below that level… but kept interest rates on hold.
The Bank of England’s credibility suffered at the time, but things seemed to be under control for a while.
This time, however, Carney should be afraid, indeed very afraid. Interest rates are at rock bottom and money printing is going out of fashion (in the Anglo Saxon world at least), so his only weapon right now is communication.
With workers setting sights on another benchmark for inflation than the one the Bank of England is targeting, it doesn’t look like he is making very good use of communication.
The weakest point of an inflation-targeting regime is the fact that its success hinges on the public credibility that the central bank enjoys.
The RMT’s leaflet just proves that the Bank of England’s actions over the past two years have eroded its credibility to the point where the public no longer trusts its benchmarks.
Although consumer price inflation is zero, people feel that their living standards keep falling – so they are choosing their own benchmark, which reflects that feeling more accurately.
With house prices rising by close to double digits each year and rents skyrocketing, property price inflation is, right now, a much better benchmark for what is really going on in the economy than consumer prices.
It may be time for the Bank of England to drop the act and admit it has been targeting the wrong inflation.
Maybe, if it adds house prices to the mix, it can still repair some of the damage it has done before the bubble blows up.