UK CPI reached 3.5% last month. That is more than 1% more than the government target of 2%.
It is the Bank of England's job to use monetary policy to make sure inflation remains within 1% plus/minus of the target.
Therefore, Mervyn King (Governor of Bank of England) had to send a letter to Alistair Darling (Chancellor of the Exchequer) explaining why he had been such a naughty boy in failing to do his homework correctly. Then Alistair wrote back to tell him not to worry.
These letters are useful for us to read since they show us what the government and B of E are feeling about the current UK economic situation.
Here is Merv's:
Mervs Letter
And this is what Alistair wrote back:
Alis Letter
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As I understand B of E have tried to boost the economy by changing interest rates and instead got high inflation. But is 3.5% a big inflation? Some countries have 5-10%
ReplyDeleteYes, compared to other countries 3.5% is quite low.
ReplyDeleteHowever, if we look over the past 15-20 years for the UK it is relatively high.
Over this period most governments (mostly Labour) have made control of inflation their key objective, and the target of 2% (plus or minus 1%) has remained unchanged.
Some economists argue that it should be changed now to a higher figure to allow more opportunity for a boost to aggregate demand.