Focusing on the mid-term
Mervyn King, the governor of the Bank of England, had to write another open letter to the Chancellor of the Exchequer yesterday, on behalf of the Monetary Policy Committee (MPC) after the consumer prices index (CPI) rose to 3.2 percent in February.
He's obliged to do so whenever the CPI deviates from the target of two percent by more than a point either way.
In his letter he points out that a fall in commodity prices has reduced the CPI from its highs of last summer but, given that we import a lot of our stuff, the relative weakness of sterling has still kept consumer prices above target.
"Since last summer, world commodity prices have fallen sharply and that has helped drive a fall in overall CPI inflation from 5.2% in September to 3.2% in February. But the effect on UK consumer prices of decreases in world prices has been dampened by the depreciation of sterling," said King.
However King still seemed more concerned about deflation in the mid-term, citing a general drop-off in industrial activity in most developed countries. "As a result of these factors, and notwithstanding the inflation outturn for February, it is likely that over the next year CPI inflation will move below target," said King.
The CPI doesn't take into account house prices, but another measure - the retail prices index (RPI) - does. It was revealed today that the RPI has fallen to zero for the first time since 1960 today so by one measurement we're already on the cusp of deflation.
In his response to this letter, Chancellor Alistair Darling basically reiterated what King had said and announced his continuing support for the MPC, especially in its focus on mid-term price stability.
