Dear Chancellor, The office for national statistics has published data showing that CPI inflation was 4.4% in July. As it is three months since I last wrote an open letter to you, and CPI inflation remains more than one percentage point above the target, I am writing a further open letter to you on behalf of the MPC. Please add this to the other eight letters I have already written.
The letter explains why inflation has moved away from target and why we intend to do nothing about it. Really it is not our fault, you put up VAT, oil prices have increased beyond reason and the Chinese have stopped shipping all those really cheap products that deflated the goods inflation in the past. [Chart 2]. Yes, that an the depreciation of sterling by 25%.
If all of the items that have pushed inflation above or below target are stripped out, the MPC would be able to claim the 2% target rate is being achieved on a month on month basis. RPI and RPIX inflation rates have hit 5% but CPI-DGI ie domestically generated inflation is showing no signs of an increase and our preferred measure CPI-MK, (named after myself) confirms the return to target has already been achieved.
As set out in the August Inflation Report, it is likely that CPI inflation will rise to around 5% in the coming months, boosted by increases in utility prices and reflecting the continuing effects of temporary factors, best described as anything above the 2% target rate.
Inflation should fall back through 2012 assuming you don’t put VAT up again and other prices begin to fall sometime soon.
Of course, there are those who would point out that CPI service sector inflation has averaged 3.6% for the last sixteen years and the 2% target rate has only been achieved by an extremely flattering 1% rate of goods inflation. This of itself a function of a relatively high sterling exchange rate, an undervalued Renminbi and cheap products from the Asian block. Such facts are unhelpful in our model understanding of the way the world really works.
I am copying this letter to the Chairman of the Treasury Select Committee. Signed the Governor.
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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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