Mervyn King completes his second term as Governor of the Bank of England in June 2013. Will inflation be on track by then? It could be a close run thing?
The inflation figures were released last week but I was a little preoccupied and didn’t get to pass comment at that time. Just as well because in the Sunday Times, an article on Andrew Sentance “The rate hawk who rocked the bank” featured a great mock up of Andrew, renowned guitarist and Led Zeppelin fanatic and the Governor of the Bank of England, on song lyrically if not in economics think. Too good to miss.
The photo can be discerned under the graph of the inflation chart, denoting the separation of goods inflation and service sector inflation. Service sector inflation has averaged 3.6% for almost twenty years and goods inflation has averaged 0.8%. This is why we are sceptical the inflation target will return to 2% in the medium term as the Bank and the OBR insist.
So what of the inflation figures in April? They are pretty bad with inflation CPI basis at 4.5% up from 4% in March. RPI inflation was 5.2% and RPIX was 5.3%.
For those lovers of the inflation alphabet, CPI-Y and CPI-CT were also heading towards 3%. Only inflation CPI-MK and GPI-GOV (i.e. core inflation eliminating anything above and below the inflation target) is on track.
Earlier this month, the Bank were warned of the potential, if not imminent, risk of the loss of credibility if inflation continues to rise towards 5% CPI basis. To strip outliers and identify core inflation, as the Bank is wont to do, offers little consolation to motorists, filling the tank and housewives undertaking the weekly food shop.
Biggest contributors to inflation in April were transport costs and alcohol and tobacco. Food, education, household services, restaurants and hotels were in line with the overall CPI figure. Service sector inflation was 4.9% and goods inflation was 3.9%. The ONS publish a figure for CPI inflation excluding, energy, food, alcohol and tobacco. Why? Even this figure was 3.7% almost twice the level of the target.
The Governor had to write another letter to the Chancellor of the Exchequer explaining that VAT, energy and import prices were the culprits in the inflation acceleration. All external to the control of the MPC. In the medium term within two to three years everything will be OK.
As the letter said “The MPC expects inflation to fall back through 2012 and into 2013, by which time the chances of inflation being above or below the target were broadly balanced.”
Mervyn King completes his second term of office in June 2013. Will inflation be on track by the end of the second term? It could be a close run thing?
Robert Plant, (vocalist and lyricist of Led Zeppelin) and the Governor were both born in 1948 and were both educated in the West Midlands. Plant was born in Kidderminster and The Governor was educated at Wolverhampton Grammar School. “When I was a kid, I used to hide behind a curtain at Christmas and pretend I was an economist” said Plant. [citation needed]. Things could have been so different. JKA
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The views expressed are my own. 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.
As the letter said “The MPC expects inflation to fall back through 2012 and into 2013, by which time the chances of inflation being above or below the target were broadly balanced.”
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The bank had warned of the potential, if not imminent, risk of loss of credibility if inflation continues to rise at 5% of the CPI.
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