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Inflation target missed again

13 September 2011

2:45 PM

13 September 2011

2:45 PM

Today’s inflation figures remind us of the trouble the Bank of England will have if – as most analysts suspect – it embarks on another phase of Quantitative Easing. CPI inflation was 4.5 per cent in the year to August, and RPI at 5.2
per cent, both up a touch from July. 

CPI inflation has now overshot the Bank of England’s 2 per cent target for 60 of the past 75 months. It has been at more than 3 per cent since the start of 2010. As a result of last month’s figure,
Governor Mervyn King wrote his now-standard letter to George Osborne to "explain" why inflation is
above the target. He wrote:

‘The current elevated rate of inflation continues to reflect the temporary impact of the factors described in recent Inflation Reports and my previous letters: the increase in the standard
rate of VAT to 20%, and past increases in global energy prices and import prices. Although it is impossible to identify the effects of those factors with precision, it is likely that inflation
would be below target in their absence.’

Really? The ONS does provide a figure for CPI inflation stripping out tax increases, and this stands at 2.9 per cent for August. It has been above 2 per cent throughout 2011. So is the rest due to
as global factors that Sir Mervyn claims? If so, the Bank might want to explain why British consumers are confronting the second highest inflation in Western Europe – behind only Iceland. Our
rate is more than double that experienced in countries like France, Italy, Sweden and Norway. Even that "contant taxes" figure of 2.9 per cent is higher than the Eurozone’s 2.5 per cent

Sir Mervyn may well have decided that, for various reasons, it’s better to tolerate high inflation a big cut in real-terms pay (down 3.1 per cent in 12 months) is better than job losses. But the
rules of the game mean he can only cite inflation to keep rates at their all-time low of 0.5 per cent. Accounting for CPI inflation reveals an even more startling fact: real interest rates are at
-3.8 per cent. This is the lowest since CPI records began in 1989. Using RPI (which goes back further), real interest rates are at the lowest since the IMF crisis in the 70s. 

For better or for worse, the British economy is being flooded with very cheap debt. This is the Bank’s official policy. And how might this end? The cover story of next week’s Spectator looks at
this question. More on this later.

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