16
Dec
Inflation heads south
Hard to believe though it may seem, inflation is set to tumble
below 1% in the second half of next year. That's official. We have
it from the Bank of England governor himself in his open letter to
the chancellor today. Strangely enough, Mervyn King's comments came
in an explanation of why inflation is so far above the official
target of 2%. With the Consumer Prices Index measure now at 4.1%,
inflation in November came in a little higher than analysts had
expected. But the inflation story of this year has been very
strange. As recently as early September, households struggling with
soaring food and fuel bills were advised that inflation was public
enemy number one. But by mid-October, the Bank of England's
position had shifted dramatically. Recession was the major threat
and inflation was deemed likely to melt away. That's not easy for
consumers to get their heads around. HEADING TOO LOW? Tumbling
commodity prices, not least oil, have pulled down the rate of
inflation. The governor says that almost all the fall in the
inflation rate from 5.2% in September to 4.1% in November is
accounted for by petrol and food prices and utility bills. The
rapid decline in economic activity since the collapse of Lehman
Brothers in September has played a big part too. There's nothing
like an impending recession to curb price rises on the High Street.
So although inflation is more than double the target rate, the
governor shows no sign of concern about it. On the contrary, he is
clearly more worried about inflation falling too low. He says it's
likely that inflation will return to its 2% target in the first
half of next year and then move 'materially below it later in the
year'. He added there was a 'risk that below-target inflation could
persist for a while'. Crucially Mervyn King acknowledged it was
very possible he would be writing a letter explaining why inflation
was too low, in other words below 1%. WORSENING OUTLOOK All this
helps explain the dramatic cuts in interest rates, from 5% in early
October down to 2% now, the lowest level since 1951. The biggest
single cut, of one and half percentage points, came at the November
meeting. This followed the Monetary Policy Committee's (MPC)
reading of the latest Inflation Report which painted a bleak
picture for 2009. Worryingly, Mr King said the economic outlook had
deteriorated since then 'driven by the continuing difficult
conditions in global money and credit markets'. The governor makes
it crystal clear he and fellow MPC members are ready to cut rates
again. The recession and deflation threats seem as vivid as ever.
The high inflation story of 2008 now seems consigned to the history
books. ARTICLE FROM BBC NEWS.CO.UK BUSINESS, Tuesday 16th December
2008.