As we inflate another
house-price bubble, which is bound to burst eventually, the Bank of England has
taken its eye firmly off the ball.
Mark Carney, the Bank’s
new governor, has said interest rates won’t go up until unemployment falls to
seven per cent – unless the outlook for inflation is that it will be above 2.5
per cent in 18 months’ time.
This is a cop-out because
the Bank’s “fan chart” for future inflation will cover every eventuality from
0.1 per cent to 10 per cent.
More worrying, though, is
that the Bank’s target of two per cent is based on the Consumer Prices Index, a
measurement of inflation which completely ignores house prices.
In an economy so
dependent on home-ownership, house price inflation is very significant.
Not only does it tell us
how fast house prices are rising, it is used to measure the country’s GDP and,
therefore, it has a significant impact on consumer confidence.
The faster house prices
rise, the more liberal people are with their money, the more they are likely to
borrow and the quicker the economy grows.
This is, in many
respects, all to the good. But – and it is a massive but – because the Bank
doesn’t take any of this into account when setting interest rates because none
of it affects CPI, the end result is that its policy ignores the elephant in
If house price inflation
were included in the calculation of general inflation, it is highly likely
interest rates would have been higher in the mid-2000s. That would have slowed
the housing market, led banks to lend less and would not have encouraged people
to borrow more than they could afford, thus reducing the house-price spiral
which ended up strangling the life out of the entire economy.
I am told there is no
such thing as an inflation measure which includes house prices. This is because
inflation measurements are based on an international standard.
But in this country the
economy is much more heavily dependent on a buoyant private housing market than
it is in many other European nations, where the renting your home is more
The other reason we don’t
include house prices is because statisticians regard houses as capital
investments not day-to-day spending. That’s a fair point but it fails to take
into account the impact – psychological as well as economic – of house-price
Mr Carney is already
guilty of abandoning the remit of the monetary policy committee and
prioritising unemployment – not part of his remit – above inflation.
That’s bad enough. It is
made worse because, as long as the Bank fails to account for rising house
prices, the inflation statistics it uses are meaningless. They have only have a
passing resemblance to the real economy.
The credit crunch and the
worst recession in living memory were caused by rampant house-price inflation
which was allowed to go unchecked by the Bank because it was aiming at the
wrong target. It seems nobody has learned from this terrible mistake.