Just how accountable are the inflation doves?

Our good friend over at Historinhas wrote a year ago expressing satisfaction at the presence of uber-doves on the Bank of England MPC.  Posen was quoted as saying the following:-

“The Bank of England‘s leading dove has predicted that inflation will tumble to 1.5% by the middle of next year as George Osborne‘s austerity drive and the underlying weakness of the economy stifle consumer spending.

In an interview with the Guardian, Adam Posen admitted he had sleepless nights over his call for more money to be pumped into the economy and said he would not seek re-election to Threadneedle Street’s monetary policy committee if his view turned out to be wrong.

Posen said: “If I have made the wrong call, not only will I switch my vote, I would not pursue a second term. They should have somebody who gets it right and not me. I am accountable for my performance. I’m holding my nerve because it is the right thing to do.”

Despite surprises in global growth to the downside since this interview (the European crisis coming as a shock to most commentators, although not to this one ), UK inflation has fallen from 5% yoy last year to 3.4% yoy at the end of Q1 2012 (vs consensus expectations of 3.1%).  JP Morgan expect inflation to reaccelerate later in the year to 4% annualized, or 3% yoy (with core inflation near 2%) – another year of inflation significantly above target.

The doves keep very quiet about their forecasting errors.  I think it is hard to attribute the likely significant overshoot in headline inflation to drastic changes to the stance of monetary and fiscal policy since the Posen interview, although certainly these have probably been in the direction of being somewhat easier than expectations at that time.

At what point does a blip become a trend, I wonder.

I do think likely very much lower energy prices will put pressure on headline inflation in the medium term, but I think longer-term we are early in a period when inflation will turn out to be persistently higher than expected based on models calibrated to the previous regime.  Over the course of months and quarters, lower gasoline prices will tend to support consumer disposable incomes.

I am not banking on an apology from the doves, but it would be nice if their expressed confidence appropriately reflected the rather thin supporting evidence for their dovishness.

When inflation continues to exceed target despite a soft economy, is it the inflation doves or the hawks who are insane?  I would say neither, but those who continue to place their faith in econometric models that have had a terrible track record of predicting turning points and those who have no previous successful record of forecasting to back their over-confident pronouncements.

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2 Responses to Just how accountable are the inflation doves?

  1. Pingback: What did they say 1 year ago? Posen vs Plosser | Historinhas

  2. W. Peden says:

    Your last paragraph hits the spot.

    Inflation targeting is only a remotely defensible policy if the output gap is readily forecastable. From about 1992-2005, you could make a good case that it was, because multiple countries were successfully flexible inflation targeting. In the UK, inflation began to considerably overshoot the target in 2006 and ever since inflation targeting has been comparable to money supply targets in the mid-to-late 1980s: people pay lip-service to them and targets are set, but their movements are highly unpredictable and the decisions of policy makers have had little to do either with forecasts or trends.

    This is the reason why even flexible inflation targeting is a fair-weather policy: when the economy is being hit by multiple supply shocks, tax distortions and a significant slowdown in productivity growth, then medium-term predictions of the output gap are unreliable.

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