Inflation letters
As inflation rises to a near sixteen year high the Governor of the Bank of England has written to the Chancellor of the Exchequer to explain why. The letters are long and technical so here is a summary.
Dear Chancellor,
Inflation is high because some prices have been rising. The Bank will continue to set interest rates to aim for its target of 2%.
Yours Mervyn King.Dear Mervyn,
Yes, prices are rising in other countries too. We support your approach and remain committed to our inflation target.
Yours Gordon.
It was supposed to be a big day. The first time the prices index had risen more than 1% above its target since the Bank of England was given the job to keep inflation low in 1997. A rise that big triggers a letter from the Bank’s Governor Mervyn King to the Chancellor explaining why he has failed. But in it the Governor was trite rather than contrite. And the Chancellor’s reply was more ‘so what?’ than ‘so what are you going to do about it?’
I warned about rising inflation in Saga Magazine in December. It alarmed me then. It frightens me now. Economists have been telling me inflation will fall. Instead it is up again - 4.8% on the Retail Prices Index and 3.1% on the Government’s preferred Consumer Prices Index, the highest since it began as the main inflation measure. But neither the Governor nor the Chancellor seems that worried. The Governor blames rising oil prices and businesses raising prices "to rebuild profit margins." Gordon Brown adds "the impact of weather conditions on food" to his list of causes and says the Monetary Policy Committee, which Mervyn King chairs and which fixes interest rates, "has been a cornerstone of economic policy over the last decade." Neither the Chancellor nor the Governor gives any indication that, apart from this being a technical breach of the target, it is really serious. But it is.
Because inflation destroys savings and retirement incomes. At 4.8% the value of money halves every fourteen years. At that rate by 2021 savings will be worth half what they are now. Fixed incomes will be worth half what they are now. And with most people living more than 14 years in retirement many people retiring today will live see their income worth half as much as it is now. A good few will see it halve again by 2035.
One thing is now almost certain. Interest rates will rise when the Monetary Policy Committee meets on 10 May. Perhaps by more than a quarter per cent. After all, Mervyn will have to be seen to be doing something. Except making excuses.
Paul Lewis
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