PricewaterhouseCoopers economist Andrew Sentance says the Monetary Policy Committee is being overly optimistic about predicting falls in inflation and has yet to get to grips with sustained patterns.
Sentance, who served as an external member of the MPC between 2006 and 2011, says there is little evidence to suggest the committee is right about CPI inflation coming down to below target.
He says: “The big fluctuations that we’ve seen from the late 1990s and the first half of the 2000s, through to more recently, have been driven by the pattern of goods prices. Services price inflation has been stuck at around 4 per cent.
“We have to see not only a fallback in goods price inflation, but also a pronounced downwards shift in that services inflation.”
Sentance says: “I think there’s precious little evidence about whether that is going to happen to the degree required to take us below the inflation target the MPC expects.”
The increasingly volatile goods price inflation rate peaked at close to 6 per cent in January 2008 and is currently holding at about 3.5 per cent. Services price inflation has remained at above 2 per cent over the previous 15 years.
“I think the MPC is continuing to be overly optimistic about the extent to the fall in inflation,” Sentance adds.
“I think there’s precious little evidence about whether that is going to happen to the degree required to take us below the inflation target the MPC expects,” says Sentance, adding that only some of the current inflation is temporary.
“Some of that reflects a more sustained pattern above target inflation the MPC has yet to get to grips with,” he explains. From June 1997 to December 2003, the Bank of England’s target was 2.5 per cent for RPIX inflation. The Chancellor, on December 10, 2003, changed the target to 2 per cent for CPI inflation.