King lifts lid on inflation error

 
Julian Harris
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Inflation was higher than official figures suggested throughout the housing bubble and credit boom, the Bank of England admitted yesterday.

Consumer price inflation was 0.3 per cent higher than previously thought every year between 1997 and 2009, due to errors on clothing prices.

Sales prices were wrongly assumed to be the norm, distorting the Office for National Statistics’ numbers. The blunder was bound to have misled the Bank, economists said, and meant that interest rates were kept too low for too long during the boom.

“If the ONS had got its figures right, the Bank might have moved more quickly to raise rates and get us out of the cheap-money spiral that caused the housing and borrowing bubble, and the inevitable bust that followed,” said Eamonn Butler of the Adam Smith Institute think tank.

“At the same time it has cheated pensioners and others on fixed incomes and budgets linked to inflation,” he commented yesterday, after the Bank published its latest Inflation Report.

The error, revealed in the Bank’s Inflation Report, had an even greater effect on the retail prices index (RPI) inflation, driving up the wedge between RPI and CPI by an additional 0.3 per cent.

Yet Bank governor Mervyn King was notably more dovish over future inflation threats than had been expected, causing investors to ease their expectations of a rise in bank rate.

Sterling interest rate futures rose across the curve, implying lower expectations of future interest rates in the UK.

Nevertheless, the market was still fully pricing in a rate hike by 9 June, with at least two 0.25 per cent rate hikes by the end of the year and a 96 per cent chance of rates being 0.75 per cent higher by the beginning of January next year.

Inflation in two years time is still “more likely to be above the target” rate of two per cent, if interest rates and the level of asset holdings were to remain at their current rates, the Bank said yesterday.

With interest rates rising according to market expectations, inflation will fall just below the target rate in two to three years, yet the Bank admitted to stronger upside risks.

Meanwhile, King admitted that there is “a wider than usual range of views among committee members” regarding the risks of inflation.

The committee’s most recent voting pattern will be published by the Bank next week.