Inflation in UK ‘inevitable’ but Bank of England should revise forecast model, says Bernanke

The double-digit record inflation in Great Britain was “inevitable,” said a former chairman of the US Federal Reserve.

Ben Bernanke told the Treasury Committee that “significant inflation” would have occurred even if the Bank of England’s processes had been better.

“Avoiding inflation entirely would have been virtually impossible without plunging the economy into a depression.

“Significant inflation was inevitable, every market economy has experienced it,” he said.

Bernanke explained to MPs his review of the Bank of England's forecasting methods earlier this year.

The Bernanke report concluded that the BoE's economic model needed an overhaul and that key systems were outdated.

The former Fed chairman said the BoE was not the only one to misjudge the threat posed to the economy by the pandemic. Central banks in general had made a collective mistake in believing that supply chain disruptions would be quickly resolved.

“[Central banks thought] The disruptions in the supply chain could be remedied relatively quickly by profit-maximizing companies by finding substitute materials or alternative manufacturing methods for their products.

“In fact, supply chain disruptions lasted much longer than most people, including experts in the field, expected.”

Nevertheless, the Nobel laureate told MPs that being a central banker was “a difficult task” and it was “very difficult to predict what will happen”.

Read more: Bank of England maintains key interest rates but hints at cut in summer

The Bank of England has been widely criticized for not reacting sooner to inflation, which hit a record 11.1% in autumn 2022, well above Threadneedle's 2% target, and has now fallen to 3.2% in March.

Bernanke said he did not believe the bank had “ignored inflation expectations” before they rose to unacceptable levels, but he reiterated one of the main themes of his review: the bank had “not devoted enough time” to maintaining the infrastructure it uses to model inflation.

“The Bank of England has actually been very busy trying to sort out the current issues and resolve the problems. Of course there has been criticism from Parliament and the public, and it has not devoted enough time to maintaining, updating and working on the infrastructure.”

He told the US Treasury Department's special committee that it is difficult to assess possible inflation shocks before they occur.

Looking ahead, Bernanke said it may be possible to improve the use of the bank's economic forecasts by incorporating alternative scenarios and being more transparent about the thinking process.

The story continues

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Bernanke noted that focusing on just one forecast “is not as transparent as I would like.” “A strong emphasis on a single forecast creates the impression that there is too much knowledge and certainty about what is going to happen. At the same time, it does not give a sense of what the alternatives are, how policy might look different, how the economy might look different, and it does not give a sufficiently comprehensive view of how the policy decisions are made.”

He said a quantitative analysis of past forecasts needed to be carried out to find out how they could be improved, and that this would involve holding regular review meetings at the bank, including members of the Monetary Policy Committee.

Bernanke also urged the BoE to place less emphasis on inflation forecasts, pointing out that the bank places more weight on its quantitative forecasts than other central banks.

Warning: British inflation was ‘inevitable’, says former Fed chief

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