As inflation broke the 3% threshold for the first time in 10 years Mervyn King - Governor of the Bank of England -was obliged to write a letter to the Chancellor explaining the reasons and what the Bank is going to do about it.
Part of the deal for being granted independence ten years ago was that the Governor of the Bank of England had to write a letter to the Chancellor if inflation rose by more than 1% point above the target of 2%.
Consumer Price Index(CPI) increased to 3.1% last week and the more generally used Retail Prices Index (RPI) increased to a 16 year high of 4.8%. The Governor of the Bank of England blamed an eclectic mix of oil prices, milk and furniture with a smaller contribution from transport costs and alcohol and tobacco.
Having explained the first part of the contract implicit in the letter i.e. why inflation has risen more than 1 percentage point above the target, he significantly failed to say what the Bank was going to do about it.
The new rate of inflation makes a rise in interest rates - probably to 5.5% - a near certainty next month and a further rise to 5.75% before the end of the year highly likely.Some commentators even predict 6% before year end.
As for the reason why the Governor has not really explained what the Bank intends to do about inflation – it is generally agreed that inflation will fall naturally back towards 2% towards the end of the year.
Read related items on:
Bank of England