Inflation CPI basis in January increased to 4%, that’s twice the level of the Bank of England target. The Governor has had to write yet another letter to the Chancellor explaining why the MPC was failing in the challenge to curb inflation. In his letter to the Chancellor, Mr King said three primary factors were behind the increase, the fall in sterling, the rise in VAT and recent increases in the prices of commodities, particularly energy.
Ultimately, he said, “inflation was as likely to be below target as it was to be above target in two to three years’ time”. Well here is the problem, as we have often said, Service sector inflation in January was 4.1%. It has averaged 3.6% for almost twenty years! That’s half the index. This was creating a problem for policy long before the fall in Sterling, the rise in VAT and the prices of commodities. Service sector inflation accounts for half the index. Goods inflation will have to fall to zero, to meet the 2% target. It doesn’t seem probable given the step change in China and the Far East.
RPI and RPIX inflation were over 5%. This is a very uncomfortable number for policy makers. Major increases in the twelve month CPI inflation rate were Food (6.3%) , Alcohol (6.7%) Transport (7.7%) Education (5.3%) and restaurants (4.5%).
The inflation alphabet includes, the CPI, the RPI, the RPIX, the RPIY, the CPIY, and the CPI-CT. Gradually all have exceeded target rate in recent months.
Expect to see anytime soon, the CPI-MK. This is the Mervyn King special inflation index which excludes indirect taxes, housing costs, local taxes, commodities, imported prices, energy costs, core and non core items but includes anything around the 2% CPI target by special Hodrick-Prescott filter process.
The Bank of England is running out of room and stretching credibility. Views within the MPC are polarising. The dependence on “gapology” is anachronistic. Two hawks are on the wing already but more doves will morph before too long. If the first quarter GDP figures are as strong as expected, interest rates will rise as early as April or May.
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The views expressed are my own and in no way reflect pro.manchester policy. In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University.
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