Tuesday, January 18, 2011

Inflation hits 3.7% - King changes his tune

Today's inflation figures show that CPI has hit 3.7%,  1.7% above the Bank of England's target rate of 2% and since January an increase of nearly one percenatge point.

What's interesting is that back in January, when I was clearly wrongly saying that an interest rate of 2.9%, (The result of the biggest single one month rise in history of one percentage point) was bad news for Labour's re-election, Meryn King was saying that interest rates would almost certainly have to rise to control it. Not only that but that the patience of Britons would be "sorely tried" as a result of stagnant pay and a real terms decline in living standards.

Fast forward to today and with interest rates at an even higher level is he saying the same thing? No he's silent and the MPC have again voted to keep interest rates where they are. In fact he has been arguing that the current level of inflation is a blip despite evidence showing it clearly isn't (Thanks to Spectator Coffee House for the graph).

The big question though is why is there no government reaction to the continued failure of the MPC to hit their legally mandated  2% target. In fact the PM's spokesman this morning said that he had complete confidence in the MPC. There are two ways you can look at the government's silence on this issues either:
1) They support the MPC's position to keep interest rates low and agree to risk inflation running away in order to prop up the housing market and give the economy a false boost (a dangerous game)
2) They really believe that interest rates should be the domain of the Bank of England and not politicians so believe that they must support them and trust their judgement on the matter.

Of these I think option two is the least worst of two evils, but it's hardly a poplicy for a stable economy.

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