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Osborne’s inflationary problem

18 May 2010

12:00 PM

18 May 2010

12:00 PM

Only a week into his new job, and George Osborne has already had to exchange letters with Mervyn King about inflation.  And here’s why: the CPI index hit 3.7 percent in April, up from 3.4 percent in
March.  Which is worrying enough when looked at in isolation – but when put alongside headline rates from other countries, it becomes damning.  In China, it’s 2.8 percent.  In France, 1.9 percent.  In Germany, 1 percent.  In the Eurozone as a whole, 1.5 percent. 
And in the US, 2.3 percent (for March, with the latest
figures out tomorrow).  Indeed, thanks in part to quantitative easing and the removal of the VAT cut, inflation in the UK is now well ahead of almost any other major economy you could care to
mention.  And with more inflationary pressures on the horizon, you imagine Osborne and King will be writing these letters for some time to come.

One thing to note about the letter Osborne wrote today, though, is its insistence that housing costs should be included in the CPI target:

"I welcome this opportunity in our exchange of letters to state clearly the Government’s absolute commitment to maintaining price stability, and as Chancellor I will support the MPC’s
decisions and actions to meet the 2 percent inflation target as measured by the 12-month increase in the Consumer Prices Index (CPI).

As we discussed, over the longer term I would welcome your views on how we might accelerate the process of including housing costs in the CPI inflation target."

Gordon Brown’s fixation with CPI targetting was perhaps the main reason why no-one noticed the swelling debt bubble.  There he was boasting about low and stable inflation while, all
the time, the housing market went into overdrive – a sign of all the easy credit sloshing around the system.  So while Osborne’s approach doesn’t completely remove the worry that something
similar might happen again, the inclusion of housing costs would certainly be a step in the right direction.


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