Listening to Wolfgang Schäuble, German finance minister, speak in London yesterday, he was genuinely shocked by Britain’s 4.5 per cent inflation rate in August. The Weimar Republic and the 1923 hyper-inflation still looms large in the German psyche.
Just imagine what he would make of today’s rise in the consumer price inflation to 5.2 per cent, the highest rate of inflation in Britain since the early 1990s.
I have not seen his text, but I am sure Sir Mervyn King will show his Anglo-Saxon side when he makes one of his three major speeches of the year tonight and will explain why he, unlike Mr Schäuble, is not concerned about inflation’s spike. Expect to hear about VAT, energy prices and commodities and that domestically generated inflation remains very low. Sir Mervyn can say nothing else.
What else can we say about today’s inflation figures and monetary policy?
With UK inflation in October still too high at 3.2 per cent, another quarter has gone by with annual price rises more than one percentage point higher than the 2 per cent target. So, it’s letter writing time again.
As we have come to expect, much of the content of Mervyn King’s letter to George Osborne is pretty boiler plate stuff, presenting again the argument in last week’s inflation report.
The three-sentence summary. Inflation is high due to a series of one-off price level changes – VAT rising to 17.5 per cent, commodity price rises and higher import prices. Inflation will remain high in 2011 as VAT rises to 20 per cent, but then is likely to fall back to target or below. There is great uncertainty and now is not a time to be complacent about inflation.
The interesting thing about the letter – and Martin Weale’s speech yesterday – is what is meant by the Bank governor’s statement that:
“the chances of inflation being above or below the target in the medium term are evenly balanced.”
Dissent is bubbling under at the Monetary Policy Committee, despite a unanimous vote on the Monetary Policy Committee to keep interest rates at 0.5 per cent with a stock of £200bn quantitative easing.
The nine members of the Bank of England’s rate-setting committee disagree on the inflationary pressure in the economy and the power of spare capacity to bring inflation down. This is evident in the minutes of the May meeting, which was held before the MPC had sight of yesterday’s bad inflation figures.