Here’s a productivity-enhancing suggestion for students of the Bank of England’s Inflation Report. To deduce the policy message, ignore the copious verbiage and focus on a single statistic – the mean forecast for inflation in two years’ time based on unchanged policy. A number above 2.0% signals that policy tightening is required. If, in addition, the number is higher than last time, tightening is judged to be more urgent.
Both conditions were met in the latest Report. The mean two-year-ahead forecast is 2.35%, up from 2.19% in February. The MPC, therefore, has become slightly more hawkish, although Mark Carney was at pains not to disturb current market expectations of a first rate rise next spring in his press conference comments. The rise in the two-year-ahead forecast follows cuts in February and November – see first chart.
This hawkish shift, despite a downward revision to GDP growth, reflects greater pessimism about near-term supply prospects. Productivity is now projected to rise by only 0.25% this year, down from 0.75% in February.
The expectation here is that a further hawkish adjustment will occur by August as pay growth exceeds the MPC’s downwardly-revised forecast. Today’s labour market report, unseen by the Bank, showed annual growth of average weekly earnings of 1.9% in the three months to March, and 3.3% in March alone, which compares with a projection of 2.5% in the fourth quarter of 2015 (cut, strangely, from 3.5% in February). The job openings or vacancies rate continues to suggest a pick-up in pay pressures – second chart.
(A monetarist gripe: The May Report contains nine pages of analysis of potential supply but only three sentences about monetary developments. The Bank’s long tradition of ignoring money continues, despite its key role in the 2005-09 financial boom / bust.)
