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The Bank of England: There’s Only One Solution!

Feb 10, 2022, 5:35 p.m. GMT
This article is more than 2 years old.
The Bank of England: There's Only One Solution!

Central Bankers have lost all sense of reality…

It is no secret that central banks have turned their full attention to the high inflation numbers.

And there is little doubt in most consumers’ minds that prices of everyday goods and services are rising faster than official measures indicate.

The Bank of England is no exception – its monetary policy committee voted 5-4 to raise the bank rate by 0.25% at its February 3 meeting, with the four dissenting members wanting a larger increase of 0.50%.

Also, the official consumer price inflation numbers in the UK show prices rose over 5% from a year ago, and the expectation is the percent increase is going higher in the coming months.

Pressure on The Bank of England is High!

The Bank of England’s statement reads: 

Twelve-month CPI inflation rose from 5.1% in November to 5.4% in December, almost 1 percentage point higher than expected at the time of the November Report.

Inflation is expected to increase further in coming months, to close to 6% in February and March, before peaking at around 7¼% in April.

This projected peak is around 2 percentage points higher than expected in the November Report.

Also, the projected overshoot of inflation relative to the 2% target mainly reflects global energy and tradable goods prices.

The further rise in energy futures prices meant that Ofgem’s utility price caps were expected to be substantially higher at the reset in April 2022.

Core goods CPI inflation is also expected to rise further, due to the impact of global bottlenecks on tradable goods prices.

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UK Consumer Price Inflation Chart
UK Consumer Price Inflation Chart

Here is the catch – the official statement says rising prices are the result of rising energy prices and global bottlenecks. However, then the Bank of England governor, the very next day, says wage increases must slow down to help the Bank of England ‘keep a grip on inflation

Moreover, going back to the BoE’s official statement on February 3:

Underlying earnings growth is estimated to have remained above pre-pandemic rates and is expected to strengthen over the coming year, to around 4¾%.

This is consistent with the results of the Bank’s Agents’ annual pay survey, with the tight labour market, and with some temporary upward pressure on wage settlements from higher price inflation.

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The BoE expects wages to grow at 4.75% meanwhile consumer price inflation is expected to grow at 7.25%.

So wages are not even expected to keep up with consumer price inflation! However, this does not even consider the increase in house prices that are growing at close to 10% per year.

Also, the bank governor does not care that wage earners are by definition losing purchasing power.

UK Average House Price Chart
UK Average House Price Chart

Wage Restraint to Keep the Grip on Inflation

Moreover, here is the real kicker – BoE Governor Bailey’s salary package (including pension benefits) totaled over £575,000 in 2021.

Yet latest figures from the Office for National Statistics for 2020 show UK’s median disposable income (after income taxes) in the UK was just £29,900.

And that this disposable income increased by only 7% during the decade from 2011 to 2020. It is an annual rate of only 0.8% per year.

And even worse this report showed that income for the poorest fifth of the population actually fell by an average of 3.8% per year between 2017 and 2020. This is when inflation is taken into account.

So not only are wages somewhat stagnating for all income levels – but declined for the poorest.

Moreover, the chart below is from the Office for National Statistics – Household Finances Survey.

 National Statistics – Household Finances Survey Chart
National Statistics – Household Finances Survey Chart

Moreover, now that central banks have backed themselves into a corner by keeping the printing presses and financed government largess spending. This is without consulting the citizens; they want the citizens to take the brunt of inflation by not asking for wage increases? 

Central banks have helped finance government largess by buying their debt which inflated asset prices including houses, and equity markets through keeping interest rates incredibly low. It was not just since covid but since the financial crisis of 2008-09.

And now that it is time to tighten policy because of inflation partly due to the pandemic they call for restraint from those that can least afford it … the loss of reality is astounding.

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From The Trading Desk

Market Update:
The much anticipated US monthly CPI figures were released today, with inflation charging higher with a larger than forecast gain of 7.5% (expected 7.2%) from a year earlier following a 7% annual gain in December.

On the back of this US treasuries surged and stock futures sold off.

General consensus prior to the release of these figures was for a 0.25% rate hike when the Fed meet in March but some analysts are now signaling we may get a 0.50% hike in March.
The increase in inflation was broad based too.

Increased food, electricity, and housing costs but there were also increases that are usually steady such as medical services.

Even stripping out the volatile food and energy components, the core price index was up 6% from a year ago (the most since 1982) with higher prices seen for household furnishings, used cars, clothing, and health care.

All this data reinforces the Fed’s intentions to begin raising rates.

The Fed 2 day meeting takes place on the 15th-16th March but they will also have to hand the February CPI and jobs numbers which will be released prior to this meeting taking place. 

We are seeing the same theme in the UK, with the BOE Chief Economist Huw Pill expressing a need for gradual tightening, in a speech released yesterday.

The expectation is for the MPC to raise rates twice more by 25bp bringing rates to 1% by the end of the year. 

The ECB met last week too and had previously ruled out any rate increases until June 2023.

They are now pointing to a rate move earlier towards the end of 2022, possibly at the December meeting.

The Euro area labour market continues to be strong as the European economies open back up. The indicators have returned to pre-crisis levels and the unemployment rate recently hit an all-time low. 

The central banks look to be on the back foot here and the question is, have they left it too late to tighten monetary policy without killing the post pandemic recovery?  

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07-02-2022 1811.15 1813.55 1340.61 1340.76 1584.76 1585.59
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31-01-2022 1790.60 1795.25 1332.21 1337.10 1602.23 1604.77
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