Wednesday, June 18, 2008

Letter To Explain Missing Inflation Target

Part of the remit of the Bank of England is to keep inflation within the government's target of CPI 2% +/- 1. If inflation falls outside the target of 1 - 3% then the Governor of the Bank of England has to write a letter of explanation to the Chancellor. It sounds a little bit like a naughty school boy writing to the headmaster to say why he hasn't done his homework.

The Governor of the Bank of England will probably find himself writing a lot of letters in the coming months. They will probably be saying something like:

"Dear Alistair,

Unfortunately, because of rising oil prices, cost push inflation has risen significantly in recent months. Usually at this stage of the economic cycle we would expect lower inflationary pressures. With house prices falling and lower consumer spending, demand pull inflation is relatively low. However, it is the rise in food and energy prices which is the main reason behind the high inflation we see today.

Because of the slowdown in the economy, we have been reluctant to raise rates to reduce inflation as higher rates at this time could push the economy into recession.

However, we expect inflation to fall back to the target in the coming months as oil prices stabilise and the slowdown reduces demand further.

Give my best wishes to Gordon, Sarah and the cat who lives at no. 11.

yours, Mervyn"

Satire on Inflation

Since we are talking about inflation targets, I can't resist adding this satirical article about the hyper inflation in Zimbabwe.

Gideon Gono, the embattled Governor of the Bank of Zimbabwe has been forced to write to the President of Zimbabwe explaining why the country’s inflation target of one million per cent has not been met this financial quarter.

The Zimbabwe retail price index just edged over the official target to 1,000,003%, although it is hard to gain a precise guide to current prices as there is nothing in any of the shops across most of the country. However official figures claim that cornmeal and maize have remained steady at 25,000,000 Zimbabwean dollars a kilo, though machetes and ankle irons have edged up in price due to increased demand over the holiday period....

Read More at News Biscuit....

Bank of England Inflation target

No comments: