Tuesday, 16 November 2010

Another Letter from the Governor to the Chancellor - UK CPI at 3.2% in October

In the UK, Inflation has exceeded 3 percent this year in every month apart from February.

Another fourth letter from Mervyn King to the Chancellor...(The governor must write to the chancellor every three months when the inflation rate deviates more than a point from the central target in either direction).

King in his open letter to the Chancellor of the Exchequer indicated that inflation will "probably" (most likely if you ask me...) stay above the bank's target of 2% till the end of next year.

He explained that inflation might (will...) increase further over the coming few months as the VAT will increase to 20.0% in January and commodity prices are rising, yet "the MPC believes that the spare capacity in companies and labor market would put downside pressure on prices till it shore it back to the target", adding that "inflation prospects remain uncertain".

In February, I argued that QE in the UK would fail and that inflation would be creeping up. I added to this analysis in April also, sating the results of QE would be inflation down the line in the UK. In May, I posted the reasons why QE was failing in the UK. It has been an ongoing theme on my blog. There is more and more a higher risk of Stagflation, low growth, high unemployement and rising commodity prices à la 70s style as I posted in July.


“With continued increases in the headline rate of inflation well above target, the bank is facing an unenviable communication challenge to try and explain why further easing would be needed,” London-based Nomura International Plc economist Philip Rush said in a telephone interview today.
Source: Bloomberg article written by Svenja O'Donnell as indicated in the link above.

The temptation of reducing the debt burden by increasing inflation is clearly in the mind of our politicians, I discussed in July. Is it the game being played in the UK at the moment?

Savers are still being punished, that's the hard reality.
Pensioners in the UK are struggling. They are the hardest hit by the rise in inflation because:
-they spend less on consumer goods that have fallen in price.
-they spend more on basics and insurance where price rises have been much higher. (British Gas has just announced a 7% price hike...).
–they have seen a dramatic fall in their savings income as interest rates have been cut to the bone...

By the way CPI does not include housing or heating costs...

There is still a very real risk of a double-dip recession in the UK. At some point the Governor of the Bank of England Mervyn King will have to raise rates to counter the rise in prices. This will put additional pressure on housing prices as well as mortgages and put more households into trouble, which would impair even more the damaged balance sheets of many UK banks.

The great bank robbery runs unabated...Inflation is purely and simply theft on a large scale.

The best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.
John Maynard Keynes

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value.
Alan Greenspan

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