18th May 2011
The UK Consumer Prices Index (CPI) rose sharply last month from 4% to 4.5%. In a letter to the chancellor George Osborne, Mervyn King said the Bank expected inflation to slip back towards its official 2% target during 2012 and 2013.
He is reported as writing: "Unemployment is high and wage growth is weak at around 2% a year. Money and credit growth are both very low. It is therefore possible that, as the temporary influence of the factors currently pushing up on inflation wanes, these downward pressures … could drag inflation below the target."
Commenting on the story and criticising the governor of the BofE, commentator Littleredcar says: "I am continually baffled with his decisions and reasoning. Even someone with basic economic training can see that interest rates need to be raised, or the problem will only get worse."
Mindful Money's economist blogger Shaun Richards says on his blog: "It becomes plainer with each passing month that the UK does have an inflation problem and that the body which is supposed to be our guardian is asleep.
"Indeed it is looking like yet another Quango which could be cut and the money saved. As we look forwards the recent dip in oil and commodity prices may help us in the latter part of 2011 but we are starting from much too high a base level and commodity prices are apt to spin on a sixpence. Let us hope that commodity prices do continue this fall as our inflation guardian has all the characteristics of a chocolate fireguard."
On Shaun Richards' blog, Janchild says: "Surely the BOE must act to raise rates a little… Once inflation gets a substantial hold as it has now done according to all the ways of measuring it which Shaun has outlined, there is a danger of a sort of feedback loop so that the rate of increase will actually accelerate. We are in danger of this happening now. Never mind about the people who will undoubtedly lose out – ie banks and people with mortgages which are "underwater". Inflation going out of control is the greater of the two evils. Surely the BOE sees this unless they really are completely useless."
Azad Zangana, Schroders' European Economist, added: "We expect inflation to fall sharply next year (due to the passing of the VAT effect) – we no longer expect inflation to fall back to the Bank of England's 2% target.
"However, there is now a significant risk of second round wage effects coming through later in response to the higher inflation we expect to see in the coming months. We think this will prompt the Bank of England to act sooner rather than later, with an August interest rate rise looking very likely."
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