16 May 2024 , 10:06
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Former Federal Reserve chairman Ben Bernanke has said that the recent spike in UK inflation was "unavoidable", even if the Bank of England had upgraded its systems.
Speaking to MPs at Parliament's Treasury Select Committee, Dr Bernanke said that groupthink wasn't necessarily responsible for many major economies' failure to accurately predict inflation's full impact over recent years. His remarks follow a report he authored last month, which identified "significant shortcomings" in the economic forecasting models used by the Bank of England.
Dr Bernanke also discovered that Bank staff were utilising "out-of-date" software that hadn't been adequately maintained. He suggested that the Bank should allocate more resources towards enhancing its forecasting systems.
The review was commissioned last year after the Bank's forecasts consistently missed their mark during a period of economic instability, attracting criticism from politicians and commentators alike. On Wednesday, the economist emphasised that there are still improvements to be made by the Bank, but argued that the UK would likely not have escaped inflation even if these enhancements had already been put into place.
"It is very important to understand that the shocks which led to inflation were global in nature," he informed the committee. "All these things were faced by all the market economies, all of whom have experienced inflation and I think avoiding inflation entirely would have been essentially impossible."
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"Significant inflation was unavoidable." Dr Bernanke proposed, "If my proposals would have been in force, the committee would have had some useful tools to think about how to respond to inflation."
In addition, he was quizzed on whether a "groupthink" mentality could have played a role in most central banks' inability to predict the inflating surge of prices. Following a rise that sent UK inflation to 11.1% by the close of 2022, this sparked significant hikes in interest rates hitting a current peak not seen for 16 years at 5.25%.
These adjustments were necessary as policymakers scrambled to revert inflation to its target range. Regarding this, Dr Bernanke conceded that predicting such surge may be a challenging task and overlooking such events isn't necessarily about groupthink. As he put it, "it is a difficult judgement to make" when it happens.
He continued: "The concerns I have are primarily with the infrastructure and I don't know how some of those problems arose. I do think some of that issue was that the Bank was very much engaged in putting out current fires, dealing with the current issues, the criticism from Parliament and the public."
"And they didn't devote enough time to the maintenance, and updating on the infrastructure. Is it indefensible? I do think that is understandable given what they were faced with. Of course when they begin the process of doing some of these hard things they may find issues that they did not think about," he predicted.
"But, as best as I can tell, it is my understanding they intend to take all 12 recommendations seriously." He said that many of his suggestions were "interlocked", thus forming a comprehensive "package" of reforms.