MNI 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

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