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Comment: the Bank's new inflation shock
Evening Standard17 Jun 2008
At 3.3 per cent, May's inflation figures, announced today, are even higher than expected. That means the Governor of the Bank of England, Mervyn King, has written an open letter to the Chancellor to explain why inflation has exceeded the Government's target of two per cent. Indeed, for good measure, he warns that inflation for the latter part of the year may well reach four per cent. But the causes are all too apparent - rising oil and food prices and a credit crunch which has, despite the best efforts of the Government, diminished the willingness of banks to lend to each other and helped tighten the housing market. The Bank may well have to consider raising interest rates - but this would only increase pressure on the beleaguered housing market and on family budgets.
Some of the roots of inflation are, in fairness, beyond the Government's control, not least the price of oil and of food on international markets. But whatever the causes, British consumers are feeling the pain, with worse to come: Mr King warned today that inflation could top four per cent this year. Matters are not made any better by the fact that the official inflation rate, the Consumer Prices Index, is far lower than the amount by which ordinary individuals feel the cost of living has risen. Indeed, one unofficial estimate puts the increase in the price of basic foodstuffs last year at nearly 20 per cent.
It would, however, be disingenuous for Mr Brown to suggest that the present economic situation has nothing to do with the Government. Had he been less profligate in public spending in the fat years, then he - and we - would be better equipped to deal with the lean ones. Britain's unbridled public-spending habits were criticised last week by the EU. They mean there is no slack in the system now.
Indeed, in a just world, it would not be the Governor of the Bank of England writing to the Government to explain why inflation has risen beyond its targets. It would be Gordon Brown writing to the Governor to admit his own part in this grim scenario.
