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Free AccessMNI INTERVIEW: BOE Has Covid Cover For CPI Miss-Ex MPC Weale
--Former BOE MPC Weale: UK CPI Doesn't Reflect Cost Of Living
--Bank Can Cite Flaws in Expected CPI Undershoot
--Weale Highlights Limitations Of Traditional And Experimental CPI Measures
By David Robinson
LONDON (MNI) - A disconnect between the Bank of England's inflation
measures and living costs during the coronavirus pandemic will provide
policymakers with ample cover for explanation if, as expected, prices fall
markedly below target in coming months, former Monetary Policy Committee member
Martin Weale told MNI.
Weale, who served two terms on the MPC and currently advises the Office for
National Statistics, said that while the traditional Consumer Price Index had
lost synch with people's spending as the epidemic plays havoc with consumption
patterns, a stripped-down experimental inflation measure under development by
the ONS will provide only a rough guide to the cost of living during Covid-19.
Governor Andrew Bailey is already in danger of being required to write a
public letter explaining a greater than one percentage point deviation from
target, after the BOE said recently that inflation was likely to fall below 1%
in the next few months, largely due to declines in energy prices.
"If there is a major deviation at the moment, say because traditional CPI
falls further because of what is happening to petrol prices, then the Governor
in the open letter will probably want to say something about how it is not clear
that this is a good underlying measure at the moment .. Certainly, if I were
drafting the letter I would want to say that," Weale said.
-- PETROL WEIGHTING
Road usage has declined sharply since lockdowns kicked in across the UK,
with motoring costs now making up significantly less of typical consumer baskets
-- but this is not reflected in headline CPI, compiled using pre-lockdown
consumption weights.
As inflation indicators miss target, the MPC will face the challenge of
both explaining distortions in the target price measure while adhering to its
remit, Weale said, although acknowledging that the public and government have
been "pretty relaxed" about such deviations in the past.
One way to measure how much prices have changed between prior to the
lockdown and since its commencement might be to average out the traditional and
experimental gauges currently being explored by the ONS. The streamlined
Covid-19 inflation calculations may not work for comparisons with earlier
periods.
"You would want something as close to the normal measure as you can have,
and the stripped-down measure, and probably take the geometric average of the
two," Weale said.
--ONGOING ISSUE
Distortions in price indices are set to continue throughout the lockdown
process, he said. The ONS also faces problems in price collection along with
tricky judgements on which scarce goods and services should be included.
In theory, the ONS could use auxiliary real time information to update some
consumption weights but it already faces a tough task gathering current data
without adding to that challenge, he said.
In his judgement, the ONS would be better off using 2019 weights for the
2021 consumption basket rather than 2020 ones, assuming that things return to
normal by the start of 2021.
--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com
--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com
[TOPICS: M$B$$$,M$E$$$,MC$$$$,MT$$$$,MX$$$$,M$$BE$,MGB$$$]
To read the full story
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Please enter your details below.
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.