Mark Carney: From Lincoln to Lothbury - Magna Carta and the Bank of
England
Lecture by Mr Mark Carney, Governor of the Bank of England and Chairman of the Financial
Stability Board, as part of the Lincoln Lectures 2015, Lincoln, 16 July 2015.
* * *
I am particularly grateful to Professor Nicholas Vincent for commenting on an earlier draft of this speech, and to
James Bell, Ben Nelson and Iain de Weymarn for assistance in its preparation.
A burst of inflation. A crisis in the public finances. Public sector bailouts. Infighting in Europe.
Not eight years ago, but eight hundred.
That was the economic context for the striking of Magna Carta.
To many today, Magna Carta is a document of profound, almost mythical, significance. It is
seen as the cornerstone of the United Kingdom's constitutional arrangements and as a
blueprint for the constitutions of many other nations, including the United States. It is credited
with establishing the foundations of parliamentary democracy, creating a framework for the
rule of law, protecting individual liberty, defending the rights of the innocent, and limiting the
role of the State.
It is undoubtedly true that Magna Carta - or more correctly the idea of Magna Carta - has
played a central role in British political development over the centuries, not least as a banner
under which those seeking liberty from oppression have rallied.
But many modern scholars argue that its significance, in and of itself, has been overstated.
They characterise Magna Carta as a pragmatic political document that was a product of its
time, including the difficult economic circumstances that then prevailed.
As usual with historical arguments, the answer lies somewhere in between.
In what follows, I will spend a few moments on the pragmatic element not only because it
plays to my comparative advantage as an economist but also because it ultimately
underscores the foundational character of the document itself.
The enduring legacy of Magna Carta is how its strictures on unconstrained power are
reflected in our systems of political and economic governance.
I will conclude that both the constitutional and pragmatic perspectives are relevant to modern
central banking and the current conduct of monetary policy. Specifically, the costs of inflation
were among the key economic catalysts of Magna Carta, and its core constitutional legacy -
namely the importance of delegated authority, with clear lines of public accountability - is at
the heart of the Bank of England's institutional arrangements. In the spirit of Magna Carta,
the Bank of England has been given a great responsibility: to deliver monetary stability for
the good of the people of the United Kingdom. Our goal, the 2 per cent inflation target, is set
by the Government, and we operate under constrained discretion in its pursuit.
1. The economic and political context
Where did Magna Carta come from?
The political background is one of nearly constant conflict both within the dysfunctional
"English" monarchical family, as well as with France over control of Normandy and the rest of
Henry II's continental empire.1
The England of the 1200s was far from a unitary state. Most matters were administered by
local barons, with the King acting as an arbiter in the event of a dispute. The relationship
between local (baronial) and central (monarchical) authority was much less deferential, and
much more arms-length, than it is today. Indeed, the early Plantagenet Kings of England
spent most of their time living at home in Normandy or Anjou, allowing the English barons a
considerable degree of autonomy. It was only after King John lost Normandy to the French in
1204 that the King resided full-time in England, breathing down the necks of the barons, who
did not much like the closer observation of their activities, and the eyeing of their stockpiles
of silver that this proximity entailed.
The relationship between the barons and King John broke down in part because of
unsustainable public finances, with John imposing an intolerably heavy and arbitrary tax
burden in order to pay for royal extravagance, infighting, and wars with the French. The royal
judicial system, whose tendrils extended ever deeper into the barons' lives, was used to
extort cash and as an instrument of royal control, rather than to ensure "justice".
What lay behind such unsustainable public finances?
First, and most obviously, the need to pay for constant military protection for the Normandy
estates created what modern-day macroeconomists would think of as an enormous
structural deficit. If John had let his expulsion from the continent be the end of the matter
this financial burden would have extinguished itself. But he did not. His folly was a series of
vain attempts to re-conquer Normandy, efforts which finally ended on the eve of Magna
Carta.2
Second, the monarchic finances had taken a colossal hit in 1193 because of the need to fund
a gigantic public sector bailout. Richard I had managed to get himself caught in Germany
on his way back from the Holy Land and was held to ransom for £66,000 in silver. Being "Too
Big To Jail", the equivalent of two to three times annual crown income was needed to bail
him out. In comparison, the government's peak cash support to UK banks in 2007-2010
amounted to a trifling one-quarter of annual UK government revenues.3
Third, the need to raise additional cash for the public finances was made much more
problematic by the strain of inflation, which accelerated in the early years of the
13th century.4 The problem was that a large proportion of regular crown income came in the
form of "farms", which were fixed rental payments for leases to use the King's land for
agriculture. These farms were fixed by custom in nominal terms, whereas the King's
expenditures were not. The King's finances were unhedged.
1
For an excellent summary, see Vincent, N (2012), Magna Carta: a very short introduction, Oxford University
Press.
2
His allies were finally defeated in 1214 at the Battle of Bouvines, which ended the 1202-1214 Anglo-French
War.
3
This would have been bad enough on its own. What was even worse was that it had come only five years after
the collection of the "Saladin Tithe", a windfall tax of a similar amount, in order to pay for a campaign to
wrestle Jerusalem out of the hands of Salahuddin Ayubi, who had captured it in 1187. That cost the barons
one-tenth of all their revenues and movable property.
4
Latimer (2001) suggests that the inflation was concentrated in the first six years or so of the thirteenth century.
See Latimer, P (2001), "The English inflation of 1180-1220 reconsidered", Past and Present, No. 171,
pages 3-29.
In fairness to the monarchy, there was not an enormous amount that could be done about
this. There was obviously no CPI(H) to which the leasehold rents could be indexed. The UK's
statistical challenges have a long history.
The preferred way of hedging the risk was to kick the leaseholders off the land, and bring it
into direct demesne management.5 This is what the barons themselves had been doing with
their own land holdings. By taking it into demesne control, instead of receiving a fixed
nominal rent, the lord of the manor could take receipt of the real output of the land, which
could be consumed, traded, or sold for silver at the going spot price. The consequence was
that the richer the baron, the more land he had to exploit, and the greater his potential profits.
The effect was to create a massively wealthy elite of oligarchs, now breaking free both of the
middling ranks of the gentry at one end, and of the hard-pressed King (or public sector) at
the other. In all of this, the option of demesne management was infeasible for the King, likely
because it would have involved destabilising relations with the administrative class of
"sheriffs" and other royal officials upon whom the King's political stability depended.6
Causes of the inflation
Forget royal infighting, wars or the whiff of revolution, it is inflation that really sets the pulses
of central bankers racing. And for good reason because closer inspection suggests that
inflation may have been a significant catalyst to Magna Carta.
Historians estimate that prices were rising sharply in the early 1200s. The prices of
agricultural goods, including wheat and oxen, probably doubled in that period.7 Evidence
suggests that prices of linen, wax, lead and even palfreys - the Toyota Prius of medieval
horses - were also rising rapidly.
Wages were rising as well - and to a greater extent than could have just been the
consequence of medieval real-wage resistance. King John was paying his knights almost
three times as much as Henry II (even though they weren't as productive on the battlefield).8
The daily rate for foot-soldiers had doubled. And limited evidence suggests the wages of
skilled labourers on the crown estates probably increased by a similar proportion.9
With pay growth approaching 20% a year, wages really were fizzing!10
The underlying causes of this inflation are debated among historians, but the most
convincing argument is that the inflation was a monetary one, albeit with a twist. Not
5
Harvey, P. D. A., (1973), "The English inflation of 1180-1220", Past and Present, No. 61, pages 3-30.
6
Given the countless other abuses of authority that were going on at the time, one wonders why it was so
problematic for the rents simply to be "renegotiated" periodically. In part, custom dictated that this was not the
done thing. In part, the problem lay with the "sheriffs" in each of England's counties. They were responsible for
collecting the fixed farms from the King's assets. In normal years, they made an enormous profit, paying only
a small fixed farm to the King, yet raking in a great deal more in terms of the real income of the counties. They
were accustomed to keeping this surplus. Any attempt to reform this system, by reducing the imbalance
between real income and fixed farm threatened to destabilise relations between the King and the vitally
significant administrative class of sheriffs and other royal officials upon whom the King's political stability
depended. As a result, the Kings' preference was to find other ways of raising the cash.
7
Latimer (ibid.). As Latimer says, "[b]etween 1198 and 1206, sheep prices, wine prices and the price paid by
the exchequer for its regular supply of cloth all indicate a steep and sustained increase."
8
Harvey (ibid.). Henry II had paid his knights 8d per day: King John was handing over 2s or 3s, an increase of
about 275%.
9
Less directly, one can infer from evidence on the exercise by manorial lords of their options to take cash
payments from their villeins (peasants), instead of forcing them to work the land, that the going rate for
unskilled farm labour must also have increased.
10
Assuming those increases occurred over the six years Latimer identifies as the period of significant inflation.
surprisingly, the quantitative information on the thirteenth century money supply is of very
poor quality, imputed, as it has been, from archaeological finds of cash hoards.11
Latimer notes that "...between the middle of the twelfth century and the middle of the
thirteenth century there was an enormous increase in the quantity of silver coins in England."
As well as the possibility of a general increase in the European silver supply (especially with
the opening up of the Harz silver mines in eastern Germany), it is likely that silver inflows to
England in particular were boosted as the counterpart to a sizeable private trade surplus -
probably resulting, especially, from the success of the wool trade with Flanders. Over several
decades, these silver inflows were likely to have much more than offset the "public sector
deficit" as silver leaked out to pay for the protection of Normandy as well as the occasional
trip to the Holy Land. As a result, the balance of payments was probably in surplus for years,
with the consequent increase in the silver money supply going unsterilised. Even to a
thirteenth century Englishman, global monetary conditions mattered.
Would Britain's constitutional history have been different had King John lamented: A Central
Bank! A Central Bank! My Kingdom for a Central Bank!?
He needed one because other factors reinforced monetary developments, including the
usual suspect - financial innovation. Specifically, developments in the common law made
land an increasingly liquid asset, and therefore one capable for the first time of being used as
a store of wealth.12
This set a medieval financial accelerator in train (about 750 years before Ben Bernanke
coined the term)13 by providing an alternative to storing one's wealth in silver coin (prone to
being whisked away by the King). This led to a reduction in the demand for silver money
balances. An increase in money velocity would have followed and with it, all else being
equal, price inflation until the transactions demand for silver had risen sufficiently to equal its
supply. At the very least, the existence of an alternative store of wealth provided an
environment in which money velocity could take off, were it to be nudged in that direction.
One possible nudge was the anticipation of the re-coinage of 1204.14 Re-coinages were good
for the King because he benefitted from the seigniorage of the re-minting fee. They were bad
for cash holders both because of the re-minting fee and because they had to exchange their
clipped coins for what they were actually worth, rather than their face value (a medieval
haircut - some of which were appalling). Consequently, there was a strong incentive not to
be the one holding the old-issue coins when the music stopped.15
So to sum up: a fiscal squeeze exacerbated by accelerating inflation, combined with
monarchical ambition and incompetence to stretch and then break relations with the barons.
11
In very crude terms, the supposition here has been that we can extrapolate from the quantity of coins found in
modern times the number of moneyers and mints that were in operation in the thirteenth century. With this
information, we can then work out how many coins each moneyer struck (the only coin in circulation at this
time being the silver penny), and then calculate the total money supply.
12
Palmer, R. C. (1985), "The Economic and Cultural Impact of the Origins of Property: 1180-1220", Law and
History Review, 3 No. 2, Autumn, pages 375-396.
13
Bernanke, B, Gertler, M and Gilchrist, S (1996), "The financial accelerator and the flight to quality", The
Review of Economics and Statistics, Vol. LXXVIII, 1, February.
14
Latimer (ibid.).
15
It is perhaps for this reason - a thirteenth century manifestation of Gresham's Law - that archaeological finds
of coin hoards are often thought to contain suspiciously high proportions of freshly minted coins.
2. Constitutional significance
In that context, Magna Carta was a desperate (and probably disingenuous) attempt at a
peace treaty that failed almost immediately.
Brokered by the Church, and issued by King John in June 1215, the Charter sought to
placate the disgruntled barons. It is doubtful that John ever intended to uphold his side of the
bargain, with all the constraints on his authority that this implied. Indeed, within a few months
of its agreement, by the end of August 1215, John had convinced Pope Innocent III to annul
the Charter on the grounds that it had been issued under duress.16 The 1215 Magna Carta
was never enacted, and England slipped into the First Barons' War.
Charters of this type were not uncommon at that time. It had been fairly routine, in fact, for
English kings to attempt to curry favour with the nobles upon whom the stability of their realm
depended by rubbishing the reputations of their predecessors and issuing "coronation
charters" that demonstrated how virtuous and peace-loving they were by comparison. It was
also fairly routine for kings to renege on the promises in those charters, creating fertile
ground to begin the cycle anew.17
What was novel about Magna Carta was that: (a) it was longer and more detailed than its
predecessors; and (b) it was issued not at John's coronation, but under compulsion from a
true political opposition, sixteen years into his reign and evidentially too late to serve its
purpose.18
This brings a second observation. Obnoxious and tyrannical as he might have been, King
John was not solely to blame for the aristocratic discontent that led to Magna Carta. His
predecessors had reneged on their promises, mismanaged the realm and imperilled its
finances. John's administrative and military incompetence were merely the straws that broke
the camel's back.
If Magna Carta was such a product of its time, how did it become to be so venerated? And
once we cut through the legend, what is its significance for economic governance today?
The revisionist interpretation of Magna Carta as a timeless statement of natural rights and
liberties became imprinted onto the minds of the English-speaking world only in the 17th
century. In large part, this was due to the work of Edward Coke. As well as being an
enormously influential jurist, Coke was also the author of popular English legal textbooks that
exported his views around the world. Coke resurrected the long-forgotten Magna Carta from
400 years of obscurity by appealing to its spirit in order to resist the absolutist tendencies of
the Stuart Kings James I and his son Charles I - themselves inspired by the continental
European model of monarchic divine-right. The Charter, Coke argued, could trace its lineage
from an ancient constitution that harked back not just to the time of pre-Norman King Edward
the Confessor, but to King Arthur himself (!): an ancient constitution that was now being
imperilled - and with it the Englishman's rightful way of life - by the tyrannical behaviour of
the Stuarts.
Despite the efforts of Coke and others, Charles I's rejection of all enterprise to constrain his
authority led to the English Civil War and to the king's beheading in 1649. Meanwhile, Coke's
unstoppable Magna Carta redux had been set in motion.
In contradiction to their behaviour at home, James and Charles had been busily granting
royal charters promising the liberties of Englishmen to the American colonists. Coke himself
had been involved in the drafting of the first charter of the Virginia Company in 1606, and
similar English liberties were extended in the charters of Massachusetts, Maryland,
Connecticut, Rhode Island and Carolina over the next sixty years.
Some have argued that references to Magna Carta, however irrelevant its provisions might
by then have been, were used as a way of "drumming up" New World settlers. To this day,
25 US States have extracts from Magna Carta on their statute books; a further 17 have the
full text. Goodness knows how the latter intend to enforce the removal of "[a]ll fish-weirs ...
from the Thames, the Medway, and throughout the whole of England, except on the sea
coast" (Clause 33). Of course, sometimes American extraterritoriality literally knows no
bounds.
Coke's romantic resurrection of Magna Carta transformed it into part of the backdrop to the
American Revolution, with his influence clearly evident in the drafting of the US Constitution.
* * *
We have seen how the economic forces and political developments of the time played a
crucial part in the mounting hostilities between King John and the barons that led to Magna
Carta and First Barons' War. Given that background, it is not as shocking as it first seems
that Magna Carta is very largely taken up with the parochial interests of the rich. It is
dominated by three basic themes: taxes; abuses of the "judicial system" with the aim of
raising revenue; and the protection of the barons' mercantile interests.
Given how irrelevant those specific concerns now seem, it is hardly surprising that almost all
of the Charter's clauses that survived the 1225 re-issue (and therefore made it into the law in
the first place) have since been repealed. In fact, only four clauses of the original 66 remain.
These stand out as different in character from the others. They are much more general,
universal and timeless. They are:
• Clause 1: Freedom for the Church.
• Clause 13: Protection for the "ancient liberties" of the City of London.
• Clause 39: No wrongful imprisonment. Perhaps the most famous clause. "No free
man shall be seized or imprisoned, or stripped of his rights or possessions, or
outlawed or exiled, or deprived of his standing in any way, nor will we proceed with
force against him, or send others to do so, except by the lawful judgment of his
equals or by the law of the land."
• Clause 40: Justice is not for sale.
Added to that, the spirit of Clause 12 of the 1215 Magna Carta (dropped from all later
reissues), that "no "scutage" or "aid" may be levied in our kingdom without its general
consent...", is clearly what would later become "no taxation without representation": to
establish a council (the embryonic embodiment of what would later become Parliament) to
agree whatever new taxes the King might demand.
Whatever their purpose at the time, the more universal clauses that remain on the statute
book certainly resonate today. They in effect encompass the idea of the rule of law and of
due process as a means to ensure justice. It is tempting, therefore, to think of these clauses
as being the enduring legacy of Magna Carta, while at the same time allowing ourselves to
patronise the juxtaposition of these apparently fundamental principles alongside so much
antiquated gibberish about fish-weirs, the obligation to construct bridges, and the theft of
wood for building castles.
This would, I think, be a mistake. The specificity of the clauses animates the general
principles. It is because they are detailed and targeted at the concerns of the time that they
are a genuine attempt to place a boundary on the authority of the King, rather than relying on
vague platitudes.19
Magna Carta was nowhere near the first attempt to encapsulate ideas of justice and good
government, nor was it the last. Indeed, it was a spectacularly unsuccessful attempt - and it
was anyway concerned only with the interests of a very small segment of society. But, largely
because King John's heirs were forced into a tight corner and therefore obliged to reissue the
charter again and again after 1215 (in 1216, 1217, 1225, 1234, 1253, 1265, 1297 and 1300,
to cite only the more famous reissues), it is Magna Carta that has become the icon of the
principle that the exercise of authority requires permission from those subject to that authority
- and that, once granted, this permission can just as easily be withdrawn.
At its most idealised, Magna Carta makes clear that power derives from the people and
constrains the authority of the state. The state can in turn devolve power - to regions - and
to independent bodies. But these bodies can never forget from where their power came or to
whom they are responsible. Their authority is constrained to that necessary to pursue
specific objectives and they are accountable to the people for their performance.
3. Monetary policy outlook
The Bank's current Monetary Policy framework embodies these principles.
It wasn't always the case. The Bank of England was brought into public ownership in 1946.
As former Governor Eddie George remarked, for the half century that followed "the Bank
operated under legislation which, remarkably, did not attempt to define our objectives or
functions." They were, instead, "assumed to carry over from [the Bank's] earlier long
history."20 In that regard, the Bank's "constitution" resembled that of the United Kingdom
more broadly, comprising a rich history of law, principle and convention.
All changed with the passing of the Bank of England Act in 1998, which made specific
"provision about the constitution, regulation, financial arrangements and functions of the
Bank." The Act brought great clarity to the Bank's responsibilities and granted independence
to the Bank for the operation of monetary policy. In delegating authority to an independent
body in this way, the Act ensured the Bank would operate under what Mervyn King described
as "constrained" rather than "unfettered" discretion. The Bank would be accountable to
Parliament for operating the instruments of monetary policy to achieve the objectives of
monetary policy, which would be determined by the Government.21
The operational independence of the Bank of England is an example of power flowing from
the people via Parliament within carefully circumscribed limits. Independence in turn
demands accountability in order that the Bank commands the legitimacy it needs to fulfil its
mission. By publishing its analysis, giving testimony, and delivering speeches, the Bank
explains how it is exercising its powers to achieve its clearly defined policy Remits.
To illustrate these points, I will conclude with some reflections on monetary policy. Our
objective, given to us by Parliament, is to maintain price stability and, subject to that, to
support the economic policy of Her Majesty's Government, including its objectives for growth
and employment. Our Remit builds in important accountability and transparency
mechanisms. One of which is the requirement for the Governor to write an open letter to the
Chancellor if inflation moves away from its 2 per cent target by more than one percentage
point.
Inflation developments
I am in the middle of a likely sequence of such open letters - I have another one due next
month - on account of the record low inflation the UK is experiencing this year, currently at
zero per cent. Such letters must explain, among other things, why inflation has deviated from
target and what policy actions the Monetary Policy Committee (MPC) is taking in response.
The "why" is straightforward. The bulk of the shortfall of inflation below target can be
explained by the sharp fall in the prices of commodities and other imported goods since last
year.
Of these, the single most important factor has been the steep drop in energy prices globally.
The rise in the value of sterling has also played an important role in lowering non-energy
import prices, which have fallen over the past twelve months. The sum total of these effects
has been to drag inflation below target by around 11⁄2 percentage points. This temporary
period of below-target inflation has provided a welcome boost to real household income.
Inflation looking ahead
The MPC's intention is to return inflation to target in a sustainable manner within two years.
That means setting Bank Rate to eliminate the remaining slack in the economy, bringing
about the sustained increase in costs necessary to achieve overall inflation of 2%.
I expect that this will involve raising Bank Rate over the next three years from its current
alltime low of 1⁄2 per cent. The need for Bank Rate to rise reflects the momentum in the
economy and a gradual firming of underlying inflationary pressures - a firming that will
become more apparent as the effects of past commodity price falls drop out of the annual
inflation rate around the end of the year. It also reflects the lags in monetary policy, given that
the peak impact on inflation of a given adjustment in interest rates is likely to materialise
around 18-24 months after the change.
As the economy evolves, different factors will become worthy of particular attention in
informing the timing, pace and degree of likely Bank Rate increases. At the current juncture,
three stand out.
First are the prospects that sustained momentum in economic activity will wring out any
remaining slack. This will require sustained growth above its past average of around 0.6 per
cent per quarter.22
Even though the current recovery has been the slowest since the Great Depression, taking
around 11⁄2 years longer to regain lost ground than it did following the recession of the 1930s,
the signs are encouraging. Looking through the blip in the first quarter, the economy has now
been growing above trend for a year and unemployment has fallen sharply over the past two.
Consumer confidence is around its highest level for over a decade. Businesses investment
intentions are solid. Momentum in the housing market is showing signs of returning.23 Survey
data point to continued momentum in real activity over the remainder of this year.
To be sure, the international risks to the growth outlook remain. The situation in Greece is
fluid, and the on-going slowdown in China could prove more significant. But on balance we
can expect the global economy to proceed at a solid, not spectacular, pace.24
Second, domestic costs need to continue to firm. After a period of particularly weak wage
growth, which reflected a marked expansion in labour supply that is now largely absorbed,
wage growth is picking up.25 The recent growth in wages has been stronger than we had
expected in May, though most of the upside news was in bonuses, which are a less reliable
guide to firms' future labour costs.26
At a minimum, when taken together with survey indicators that continue to point to solid pay
growth for new recruits, recent data give welcome reassurance that the risks associated with
a deflationary mindset in the labour market have likely fallen significantly.
Further positive wage developments should be supported by a continued tightening in the
labour market. Job-to-job flows remain around post-crisis highs and the ratio of vacancies to
unemployment is now back to its pre-crisis average.
However, what matters for inflation is not wage growth in isolation but wage growth relative
to productivity. Put simply, firms are less likely to raise their prices if higher wages reflect
more output per hour worked. Along with faster wage growth, there have been signs of faster
productivity growth since the turn of the year. This may well mean firms' unit labour costs
have not picked up quite to the degree we had expected in our May Inflation Report. It's too
early to be definitive. Weighing past disappointments and recent indications of a pick-up, it is
prudent to recognise that two-sided risks to productivity growth remain.
What is clear is that to return inflation to target, growth in labour costs must pick up further
from their current rate of less than one per cent. The extent needed depends on what is
happening to other costs. In the decade prior to the crisis, labour costs grew by around 21⁄2
per cent each year on average, with wages and salaries growing at around 43⁄4 per cent and
productivity at 21⁄4 per cent. Inflation averaged 2 per cent,27 however, in part because import
prices rose only by around 1⁄4 per cent each year at the same time.
The possibility that history might repeat itself points to a third important consideration: the
need to monitor developments in firms' costs other than labour. The sum of these is evident
in so-called "core" inflation, which are measures of prices that strip out the most volatile
determinants of inflation, like energy prices, revealing more persistent trends. In an open
economy like the United Kingdom's, those factors include import prices, which are affected
by movements in the value of sterling, and which, on past experience, can take a
considerable time to pass through to core inflation.28
24
In our May projections, the MPC expected PPP-weighted worth growth of 3 1⁄4 per cent in 2015 and 3 3⁄4 per
cent in 2016 and 2017, just shy of the pre-crisis average of around 4 per cent.
25
I discussed labour supply developments in the UK in detail last autumn. See Carney, M (2014), Speech to the
Trades Union Congress Annual Conference, 9th September 2014.
26
Unlike regular pay, bonuses are closer in spirit to dividend payments, being state-contingent disbursements of
profits. That observation may imply bonus payments are a useful cyclical indicator, although interpreting the
data is potentially complicated by changes in taxes that shift the incentive to pay bonuses over time.
27
Accounting for the mis-measurement of clothing and footwear prices, which existed until 2010 and biased
measured annual CPI inflation downwards by around 0.4 percentage points. See Bank of England (2011),
Inflation Report, February, box on page 39.
28
One way to illustrate the impact of import prices is to consider measures of core inflation adjusted for import
intensity. These measures suggest that the current rate of core inflation is being dragged down by import
prices by around 1 percentage point. That is a sizeable effect, and reflects, in part, changes in the value of
sterling. The core measure referred to here is CPI inflation excluding food, energy, education, alcohol, tobacco
and VAT, and the measure adjusted for imp