"King lifts lid on inflation error"

City AM's headline is presumably their entry in the "understatement of the year" competition, it's not some little minor technical error, it seems fairly fundamental. The article explains:

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.

1. Well, given the BoE's remit of "keep the house price bubble going, or else", I'd say they got interest rates about right, but hey. If the BoE (and by extension the government) were actually serious about inflation (which they aren't and haven't been for ages) there's no need to go round measuring CPI, RPI and all that nonsense, it's quite sufficient to look at house prices/land values. If there is 'too much' money sloshing around, then it feeds through into higher house prices/land values; so if they are rising faster than x% then that is a sign of inflation.

2. Mainstream economics* says that a) you can combat inflation by increasing interest rates, but b) that has a negative impact on the economy. This is the excuse they are now using to ignore inflation that is running way over the official target of 2%, although the real reason they don't dare increasing interest rates is because their precious house price bubble would finally pop.

3. So what the article is saying is that they completely failed to notice the house price boom, and if only some statistician had weighted clothes prices slightly differently, then none of this would have happened? Is anybody really that gullible? I suppose they must be - Mr Butler fell for it hook, line and sinker:

“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.

4. It appears that banking shill Allister Heath on page 2 of the same paper is only too keen to toe the party line:

This may seem like a small error but it was a major gaffe. Interest rates would undoubtedly have been higher every year during the bubble had the Bank known prices were going up as much as they were. Even half a per cent more on rates would have dampened credit growth and property prices; the bubble wouldn’t have been as bad.

* Proper economics says it's best to leave interest rates to the markets and to prevent bubbles in house prices/land values by taxing them (which does not damage the real economy, and the receipts can be used to pay off national debt or reduce other taxes, which boost the real economy even more in a virtuous circle), but this is a separate debate. DBC Reed-onomics goes even further than this.