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.

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...

Find this article useful?

Get more great articles like this in your inbox every lunchtime

The ignominious death of Gordon Gekko

Profit at all costs is a defunct philosophy, and purpose a corporate superpower, argues this...

Gender bias is kept alive by those who think it is dead

Research: Greater representation of women does not automatically lead to equal treatment.

What I learned leading a Syrian bank through a civil war

Louai Al Roumani was CFO of Syria's largest private retail bank when the conflict broke...

Martin Sorrell: “There’s something about the unfairness of it that drives me”

EXCLUSIVE: The agency juggernaut on bouncing back, what he would do with WPP and why...

The 10 values that will matter most after COVID-19

According to a survey of Management Today readers.

Why efficiency is holding you back

There is a trade-off between performance and reliability, but it doesn’t have to be zero-sum....