Another letter from the Bank, Darling

As inflation tops 3%, the Chancellor will be demanding an explanatory letter from Mervyn King. Perhaps his email's down.

by
Last Updated: 06 Nov 2012

The latest figures from the Office of National Statistics reveal that the Consumer Price Index, the standard measure of inflation, hit 3.3% in May. That’s a 0.3% rise on the previous month, apparently taking inflation to its highest level in 16 years. And with CPI now running 1.3% above the Bank’s Treasury-imposed target of 2%, we all know what that means: for only the second time in 11 years, Bank Governor Mervyn King will have to write an open letter to the Chancellor of the Exchequer, explaining why this has happened and what he’s planning to do about it.

Not that there’s any great mystery about the first point. It’s certainly not because we’re all spending money like there’s no tomorrow (quite the reverse, in fact). The spiralling cost of food and fuel is obviously to blame – food and drink is now 7.8% more expensive than this time last year, according to the ONS, while the oil price continues its unprecedented and apparently irrational rise. Yesterday it jumped to a new high of almost $140/ barrel, as the world entirely ignored Saudi promises to boost production (under pressure from the UN). So you can probably guess what King’s excuses are going to be.

More debatable is exactly what he plans to do about it. Some in the City seem to think the MPC might raise interest rates next time round, if only in a bid to regain market confidence in the Bank’s ability to control inflation (although it might end up proving the exact opposite, of course). However, this is hardly ideal at a time when the economy is clearly slowing down; pretty much all the other indicators suggest King and co should be doing their best to boost spending, not rein it in. At least one member of the MPC is still in favour of a cut.

Either way the forthcoming letter should give us a better idea of his plans. Although it does seem a strangely quaint way of doing things, a kind of Jane Austen approach to monetary policy. We’re not entirely sure why this couldn’t have been done by email (unless Threadneedle Street considers this a bit new-fangled) or even by conference call (unless the Treasury’s had its phones cut off in a bid to raise a bit of cash for Gordon Brown’s spending plans). Or even, for that matter, by a press statement (given that it effectively amounts to the same thing anyway).

But letter-writing it is - and with CPI predicted to hit 4% by the autumn, there'll be plenty of ink expended in Mervyn’s office before the year is out...

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