From the TUC

Inflation up: cue panic!

19 Jan 2010, by Guest in Economics

There seems to be a consensus (amazing how these things can emerge in the space of minutes!) that Mervyn King will be weeping with fear at the sight of today’s unexpectedly high inflation figures.  I can’t honestly say what the Governor’s immediate reaction will be but if there is any sense of panic on the Monetary Policy Committee, it would be utterly misplaced.

It is clearly far too early to determine what the actual inflationary trend will be for the medium term. And, despite Andrew Sentance’s comments last week, it would be madness for the MPC to start considering an interest rate rise when growth, demand, confidence and the labour market still remain so suppressed.

Those who think King will be upset at the prospect at having to write a letter to the Chancellor if CPI goes above 3% in next month’s stats, forget that the aim of the letter is not to apologise but to explain the MPC’s thinking and strategy.  I doubt very much that the Chancellor wants a letter explaining that due to the sudden spike in inflation, the MPC is now going to aggressively raise interest rates and I doubt King will be inclined to write one.  A steady as she goes approach will go down well in the Treaury for the time being is my guess.

The real problem will emerge when the hawks on the MPC convince themselves that inflation is a bigger threat than low growth which may happen later this year.  As soon as you start hearing the phrases “core inflation”, “inflationary expectations” and “wage price spiral” from commentators and MPC members you will know that the Bank is at risk of making one its infamous duff calls.

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