|
21 February 2011 |
Over the last few weeks, I have been writing about my travels or besmirching the good name of Justin's column with such crucial matters as love and applied economics. However, I was jolted back to earth this week upon reading a report suggesting that on top of my newly increased Oyster card fare, I'm paying 4.
Over the last few weeks, I have been writing about my travels or besmirching the good name of Justin's column with such crucial matters as love and applied economics. However, I was jolted back to earth this week upon reading a report suggesting that on top of my newly increased Oyster card fare, I'm paying 4.5% more for eating out at restaurants than I was a year ago. So that's where all my money has been disappearing!
The report previously mentioned is none other than the inflation data released by the Office of National Statistics, followed in short order by the equally dismal Inflation Report published by the Bank of England. So carefully scrutinised is each word spoken by the Bank's governor Mervyn King, that he may be forgiven for wishing he existed in a world of Hollywood script writers, enjoying a far more triumphant version of the 'King's Speech'.
Instead, King has found himself having to back track on some of his words, sometimes appearing to be contradictory, and possibly damagingly so. The Bank of England's logic and credibility has been under fire for quite a while as inflation has been above the target of 2% for 33 out of the last 39 months. The latest CPI number was a target busting (not in a good way) 4%. Ambiguity in King's words is perhaps not what is needed at present, as a lack of perceived credibility could undermine confidence and currency.
In January, at a speech in Newcastle's Civic Centre, Mervyn King fiercely defended the Monetary Policy Committee's (MPC) thinking. Despite the level of unhappiness persisting regarding the higher levels of inflation, he suggested that it is a misunderstanding to believe that the MPC could have prevented the squeeze in living standards by raising rates. In particular, he pointed out that the current type is driven by a sharp rise in commodity prices, a weak Sterling pushing up import prices and a hike in the VAT. He argued that the MPC could not affect the amount we pay for food and energy or the country's trade deficit, or the government's policy on taxation. Indeed, Mr King claimed that had the MPC raised rates significantly, "inflation might well have started to fall back this year, only because the recovery would have been slower, unemployment higher... The erosion of living standards would have been even greater".
It was reiterated that the MPC's remit was being stuck to, that inflation was likely to be well above target for a few months but it had not abandoned its commitment to reducing inflation to 2%. So it came as a surprise earlier this week, when Mr King in his letter to the Chancellor explained that inflation was equally likely to be above or below target in the medium term "under the assumption that Bank Rate increases in line with market expectations."
Whilst many were more entertainingly engaged in the game of listing all the goods that were soaring above the 4% rate of inflation [car insurance: up 29%, fruit: up 12%, mineral water: 12% (what exactly is wrong with tap water anyway?), coffee, tea and cocoa: up 8.4%], markets were busy pricing in a rate hike by May. The prices of Short Sterling futures contracts indicate that the market is expecting a 1% rate rise by the end of the year. Many reputable economists read the key phrase, highlighted above, as the Bank of England's endorsement of market rate expectations.
In another turn of events, in Mr King's opening remarks which accompanied the release of the Inflation Report, he indicated that he may be in no mood to change the inflationary approach to adjust the living standards post-crisis. Admittedly he did so via a humorous quote |
|
