Inflation up to 4.7% - another letter!

The annual rate of UK inflation rose to 4.7% in August from 4.4% the month before, a higher-than-expected jump. Inflation as measured by the Retail Prices Index (RPI) - often used in pay negotiations - fell to 4.8% from 5%. The biggest contributor to this rise was the increase in energy prices which outweighed a number of prices falls. For the third time the Governor of the Bank of England, Mervyn King, was forced to write a letter to the Chancellor explaining why the inflation target had not been met. The BBC site as a nice video feature looking at the content of the Governor's letter. (Link)

Economy slowing down ... or is it?

The Bank of England had warned the UK was heading for difficult times and it would act to rein in inflation. The Bank of England's governor, Mervyn King, said the UK was facing its "most difficult economic challenge for two decades". (View video of speech) The following day a record level of retail spending in May provided a respite from gloomy economic predictions, but it also fanned fears of higher interest rates. Sales rose by 3.5% during May, the strongest monthly growth since January 1986, statistical office figures show. Shocked analysts said the figures ran contrary to signs of a slowing economy and weak consumer confidence. (Details here)

Mervyn King made it clear that inflation was set to rise whilst house prices would fall. He said the MPC was "prepared to take whatever action is needed" to bring inflation back down to the government's 2% target. The latest inflation figures showed that the rate of consumer price growth had accelerated to 3.3% in May. However, Mr King added that monetary policy alone could not prevent the current effects of rising food and energy prices on living standards. People would have to accept that their pay rises would have to be limited which would affect real take home pay and make life difficult for some.

Inflation 'likely to rise further'

Both official measures of UK inflation rose in May. CPI was up to 3.3% from 3% and RPI to 4.3% form 4.2%. Rising food and energy prices could push UK consumer inflation above 4% this year, the governor of the Bank of England has warned. This month's rise meant that he has had to write the dreaded letter to the Chancellor explaining what measures are being taken to bring inflation under control. In it he says "As things stand, inflation is likely to rise sharply in the second half of the year, to above 4%... (but) there are considerable uncertainties, in both directions, around this, and any such projection is particularly sensitive to changes in domestic gas and electricity prices." British households must learn to live with higher prices and without increased wages, Mervyn King warned. (Link to BBC News) (Link to The Guardian article)

UK households have become increasingly aware of inflation over the past year, and expect it to rise over the coming 12 months, new research suggests ... energy, petrol and food price rises have increased inflation awareness. Inflationary expectations have proved to be significant in accelerating the rate of inflation in the past. (Link to BBC News)

The Bank of England’s Monetary Policy Committee voted eight against one to hold interest rates at 5 per cent this month, but some members were ready to consider an immediate rate rise to contain inflation, minutes of the meeting showed on Wednesday. “If there were a serious threat to medium term inflation expectations then a pre-emptive rise in rates would be appropriate. Delay would only increase the eventual costs of bringing inflation back to target,” the minutes said.

Inflation ...all the fault of the MPC?

According to an article in today's FT, 'the increase in consumer prices index inflation since mid-2007 can be largely explained by rising global prices for food and energy. The deeper question, however, is why these have not been offset by slower rises or falls for other products and services, as would be expected if monetary policy had been correctly calibrated to meet the inflation target.' The MPC ' allowed excessively loose monetary conditions to develop between 2005 and 2007. Bank rate was cut inappropriately in 2005 and maintained below its neutral level until 2007. During this period, investors’ risk appetites significantly increased. The result was a prolonged period of buoyant money and credit expansion.' They discussed rapid money and credit growth in 2006 and 2007 but'played down the dangers'. The upshot is that official neglect of monetary warning signals has once again been followed by 'an unexpectedly large rise in inflation although the details of the transmission mechanism differ. In effect, loose domestic monetary conditions have accommodated or even supplemented the inflationary impact of rising global costs.' It is also suggested that there is liitle scope for further interest rate cuts in the near future. Read the article.

Government 'should change inflation target'

Consumers will be "crucified" unless the government changes its inflation target, a leading economist has warned. Peter Spencer from the influential Ernst & Young Item Club is urging ministers to change the 2% inflation target used by the Bank of England. He warned that interest rates would have to stay at 5% if inflation is to be brought down to 2%. He added that keeping interest rates at their current level would hurt hard-pressed households. Professor Spencer said consumers were paying the price for an inflation target that had become unrealistic given the volatility of oil and food prices. He called for the Bank of England's remit to change so it focused on "core inflation", a measure that excludes food and energy prices and is used in the US. Read details here.

David Smith's piece in the Sundaty Times also makes an interesting read, especially the divergence between base rate and other interest rates in the economy, those that have a real impact on economic activity. Link to article. Geoff Riley provides a summary of the key points on the tutor2u blog. Link

Does the CPI reflect the 'real' level of inflation in the economy?

UK growth lowest for three years

Economic growth in Britain has slowed to its weakest in three years, official data showed today, as last year's interest rate increases and the credit crunch take their toll. The Office for National Statistics said the economy grew 0.4% in the first three months of the year, down from 0.6% in the final quarter of 2007.

http://www.guardian.co.uk/business/2008/apr/25/gdp.growth
http://news.bbc.co.uk/1/hi/business/7366534.stm

What will be the effects of slower growth? Is this news likely to affect the interest rate decision of the Monetary Policy Committee(MPC) when it next meets?