To those who have been watching the broad money supply for the last couple of years or so, it was blindingly obvious that inflation would take off after a decent ‘long and variable’ lag. Well, UK CPI inflation is now 7% and even the Bank of England now admits it could soon hit 10%.
The return of inflation has come as a surprise to many analysts. These include, most notably, especially even the Mystic Moggs at the Bank.
In August 2020, the Bank stated (see p. ii) that
In the MPC’s central [inflation] projection, conditioned on prevailing market yields, CPI inflation is expected to be around 2% in two years’ time.
A year later, the Bank stated
3.4: … The MPC expects CPI inflation to rise temporarily to around 4% in the near term, before falling back towards 2%. … Inflation starts to decline in 2022, and returns to the 2% target in late 2023(Chart 3.2).
Those are some specular forecasting failures, even by the Bank’s standards.
To be fair, the Bank is not alone. The Fed has made much the same set of mistakes: first they said there would be no inflation, then they said it would be temporary, then they were looking for it in all the wrong places, and now the dovest of Fed doves are turning into inflation hawks. See this piece by Steve Hanke and me in the latest National Review: “The Fed Looks for Inflation in All the Wrong Places.”
[DB adds: Andrew Bailey is appearing on Parliament TV this afternoon, so don’t forget to tune in]