MNI POLICY: BOE Split Over Measures Of Inflation Persistence

Uncertainty over when the Bank of England is likely to begin cutting rates is being increased by divisions within the Monetary Policy Committee over how much weight to place on different measures of the persistence of service sector inflation.

MPC policy statements have stressed that components of services prices are continuing to feed consumer price inflation as goods inflation fades, but public comments by its members point to a lack of agreement over how much the different measures matter.

While BOE Chief Economist Huw Pill has cited lingering service price inflation as justification for saying that the time for cutting Bank Rate is still “some way off," Deputy Governor Dave Ramsden has argued that the temporary surge in energy prices means that neither core nor services prices are reliable measures of underlying inflationary pressures. Citing research by former MPC member Gertjan Vlieghe, Ramsden said he had become more confident that risks to the persistence of domestic inflation pressures are to the downside, prompting speculation he could vote for a May cut. (See MNI INTERVIEW: Services Inflation Poor Policy Guide - Vlieghe)

DIFFERING MEASURES

Insiders Ramsden and Pill are not the only members of the Committee sending varying messages on services price inflation.

In a recent speech Cathy Mann, who has switched to backing unchanged policy after earlier calling for a hike, pointed to worrying signals from discretionary spending on services, such as on hotels and restaurants, though without providing precise details of the inflationary measure to which she was referring.

Fellow external member Megan Greene, who like Mann has counselled against any swift move to cut rates, was more specific about the source of her concern, identifying persistent inflation in services excluding energy-intensive sectors such as transportation, accommodation, recreation and sport and package holidays. But these account for a hefty 40% of total services, and Greene's measure has not been part of the Bank's regular commentary on inflation pressure.

Other central banks, like the Federal Reserve and the Bank of Japan, refer to an index of super-core prices which is key for guiding market watchers, but, with its differing views, the BOE has not followed suit. While in its February Monetary Policy Report it did provide a measure based on work by Bank economist Galina Potjagailo, it did not commit to its regular publication, and the Bank is only likely to provide updates when the MPC sees it as useful.

Potjagailo’s model, which creates an underlying inflation measure, similar to the Fed's, by identifying a common component in individual items' inflation rates and stripping out idiosyncratic fluctuations, indicated that underlying inflation started falling gradually before headline services inflation peaked and that it continues to fall.