Tuesday, June 17, 2008
Inflation at 3.3%, and a letter
Posted by David Smith at 10:35 AM
Category: Thoughts and responses

Inflation rose above 3.3%, as generally expected, triggering a second governor-chancellor letter (and the chancellor's response) in more than 11 years of independence. Food and energy were the main culprits behnd the rise from 3%, though "core" inflation also edged up from 1.4% to 1.5%.

RPIX inflation, at 4.4%, was 1.9 percentage points above its old 2.5% target, compared with a 1.3 percentage point overshoot for CPI inflation. RPIX inflation jumped by 0.4 percentage points. In contrast, RPI inflation rose only modestly, from 4.2% to 4.3%.

Mervyn King's letter is here. It suggests inflation may rise above 4%, more than the Bank expected in its May inflation report, but lays the blame squarely on rising food and energy prices, responsible for 1.1 of the 1.2 percentage point rise in CPI inflation since December. It explains why the Bank has felt able to cut rates even though inflation is above target. But it warns against a more general shift in wage and price-setting behaviour. The Bank does not rule out higher rates but leans quite a long way against them.