Worrying signs of inflation just emerged in the UK, whereby prices rose well above the Government’s target.
This could threaten the country’s ability to use easy-money to stimulate the economy.
[Emphasis added] Britain’s benchmark inflation rate jumped to 3.5pc in January to a 14-month high after a rise in value-added tax.
Mervyn King, the Bank of England Governor, has written to the Chancellor explaining why inflation has risen more than one percentage point above the 2pc target. Mr King said in the letter that inflation had risen due to three “short-run factors. “First, the restoration of the standard rate of VAT to 17.5pc is raising prices relative to a year ago.
“Second, over the past year, oil prices have risen by around 70%. That is pushing up petrol-price inflation significantly, which, in turn, is raising overall CPI inflation.
“Third, although the exchange rate has been broadly stable over the past year, the effects of the sharp depreciation of sterling in 2007 and 2008 are continuing to feed through to consumer prices.
So far, the central bank “expects this to be a temporary deviation of inflation from the target,” and that “inflation is more likely than not to fall back to the target in the second half of this year, as the short-run factors wane and the influence of spare capacity builds.” Hopefully it doesn’t persist.
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