A James Alexander post
Yesterday the UK inflation data for July came out. Core inflation “surged” from 0.8% to 1.2%. This was not just journalistic hype. Importantly the core inflation rate was 0.3% above market expectations. The market’s response? To push Sterling up against the already strong US Dollar by 1.3%.
Why this crazy, upward, dancing on the top of a tiny inflation pinhead? Because the Bank of England has a strong bias to tighten. Hence, news on core inflation ahead of expectations drives up Sterling and effectively tightens monetary policy. As Market Monetarists say: the market reaction is the policy.
The constant driving up of Sterling to pre-crisis levels should be recognised for the tight money signalling that it represents, and that the insane idea to actually raise rates would badly compound this current monetary tightening.
At the very least the BoE should go back to its policy of implicit flexible inflation targeting as it did when core inflation was consistently above its target. Better still move to targeting Nominal GDP (aka Aggregate Demand) and not something as flaky and little understood as core CPI.