Tuesday, 17 August 2010

Inflation not gone away yet

UK inflation eased to 3.1% in July from 3.2% in June, the third month in a row that prices have risen more slowly. However, the Consumer Prices Index (CPI) is still well above the Bank of England's 2% target rate. The Retail Prices Index (RPI) slowed to 4.8% from 5% in June. Source

So inflation is over target yet again, like it has been all year. Mervyn has written to George. George has replied.

Mervyn says...
Inflation has been volatile over the past two years or so. In that time, it has moved above 5%, then fallen to 1.1 %, risen again to 3.7%, and has since started to fall back once more. But on average over that period, inflation has been above the target. And the recent strength of inflation has surprised the MPC.

The strength of inflation didn't really surprise anyone else though. If you reduce interest rates to an unprecedented 0.5% and pump £200bn of QE money into the economy that's what happens.

George replies...
The MPC's remit allows it to look through short-term movements in inflation and I note the Committee's central view that inflation should continue to move back towards target over time. [...] CPI inflation is likely to fall back to a little under 2 per cent in early 2012.

Well that's reassuring. But what about the two or three years of over-target inflation we will have had by then? Does that ever get cancelled? Nope, that's locked in forever.

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