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Inflation - it's worse than they're letting on
Inflation is out of control, the Governor of the Bank of England does not know how to control it, and the Chancellor gives him his full support, says Paul Lewis
That is the reaction this week to the shocking news that inflation, measured in the way the Government prefers (Consumer Price Index - CPI), is 3.3%. That is the highest it has been since July 1992 when John Major had just won his first full term. But then inflation was falling. We have to go back 20 years to April 1988 when Nigel Lawson was Chancellor to find it rising through 3.3%. Two years later it was more than 8%.
The target for CPI inflation is 2%. And the rule is that when it is more than 1% above that target the Governor of the Bank of England writes to the Chancellor of the Exchequer explaining why he has missed his target and what he intends to do about it. This month’s ‘letter’ is four pages long. Here is a précis:
“Dear Chancellor,
Sorry. But it isn’t my fault. Blame stuff that’s happening abroad like oil and gas and wheat. Not much I can do about that. I don’t expect it to get better for a while, in fact it will soon get worse, topping 4% probably.
In some ways it is not as bad as it might be, given everything. And the good news is we will at least keep in touch, as I expect to be writing to you a lot over the next year or so.
Yours, Mervyn.”
The Chancellor’s reply was shorter.
“Dear Governor,
I agree. You have my full support.
Yours, Alistair.”
But this anodyne explanation just won’t do. Yes oil and gas and wheat and copper are rising strongly in price. But when cheap imported goods from China brought down inflation the Bank was happy not only to take credit for it but to cut interest rates. That fuelled an unsustainable boom paid for by cheap credit. Those days are over. And now we are facing the bust.
We should also remember that inflation for many people is not 3.3% or anything like it. The more familiar Retail Prices Index is 4.4%, pushed by food prices up nearly 8%, energy bills more than 12%, and motoring costs almost 5%.
I warned here in April 2007 (and in Saga Magazine in December 2006) that inflation was back. More than a year on, the Governor of the Bank of England admits he can’t control it. And the Chancellor barely raises his famous black eyebrows.
Read the full letters here: www.bankofengland.co.uk/publications
* Paul Lewis is the editor of Saga Magazine's Money News section and the presenter of BBC Radio 4's Moneybox. Paul's opinions are his own and for general information only. Always seek independent financial advice.
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