Tuesday, 16 February 2010

Inflation reaches 3.5% but Merv doesn't care

CPI was 3.5% in January, up from 2.9% in December.
RPI was 3.7%, up from 2.4% previously.

The Governor of the Bank of England, Mervyn King, is quite sanguine about this. He sees calmer seas in the medium term so is happy to ignore the current inflation. In his letter to Alistair Darling he says:

Three such short-run factors have driven the current measured rate of inflation up. First, the restoration of the standard rate of VAT to 17.5% is raising prices relative to a year ago. Second, over the past year, oil prices have risen by around 70%. That is pushing up petrol-price inflation significantly, which, in turn, is raising overall CPI inflation. Third, although the exchange rate has been broadly stable over the past year, the effects of the sharp depreciation of sterling in 2007 and 2008 are continuing to feed through to consumer prices.

He conveniently forgets to mention that 1) VAT has merely returned to its normal rate, and 2) oil is priced in dollars so the fall in sterling also contributes to its rise, and 3) the fall in the value of sterling is HIS FAULT! If he'd raised interest rates before 2007 sterling wouldn't have fallen.

He blithely continues:

...the average weekly earnings measure of pay has increased by around 1% over the past year.

So put that together: RPI inflation is 3.7%, pay growth is 1%, so everyone has had a real terms pay cut of 2.7%. (He goes on to say this doesn't apply in the financial sector.)

He then hazards a guess that inflation may be back under its 3% hard limit by the end of the year, and so justifies twiddling his thumbs.

Alistair Darling's reply is equally sanguine. Reading between the lines it says please do nothing painful until after the election; better that the economy vapourises than we lose seats in May (if they can hold out that long.)

BBC report
MK's letter to AD
AD's reply

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