Over the last few weeks, I have been writing about my travels or besmirching the good name of Justin’s column with such crucial matters as love and applied economics. However, I was jolted back to earth this week upon reading a report suggesting that on top of my newly increased Oyster card fare, I’m paying 4.5% more for eating out at restaurants than I was a year ago. So that’s where all my money has been disappearing!
The report previously mentioned is none other than the inflation data released by the Office of National Statistics, followed in short order by the equally dismal Inflation Report published by the Bank of England. So carefully scrutinised is each word spoken by the Bank’s governor Mervyn King, that he may be forgiven for wishing he existed in a world of Hollywood script writers, enjoying a far more triumphant version of the ‘King’s Speech’.

Instead, King has found himself having to back track on some of his words, sometimes appearing to be contradictory, and possibly damagingly so. The Bank of England’s logic and credibility has been under fire for quite a while as inflation has been above the target of 2% for 33 out of the last 39 months. The latest CPI number was a target busting (not in a good way) 4%. Ambiguity in King’s words is perhaps not what is needed at present, as a lack of perceived credibility could undermine confidence and currency.
In January, at a speech in Newcastle’s Civic Centre, Mervyn King fiercely defended the Monetary Policy Committee’s (MPC) thinking. Despite the level of unhappiness persisting regarding the higher levels of inflation, he suggested that it is a misunderstanding to believe that the MPC could have prevented the squeeze in living standards by raising rates. In particular, he pointed out that the current type is driven by a sharp rise in commodity prices, a weak Sterling pushing up import prices and a hike in the VAT. He argued that the MPC could not affect the amount we pay for food and energy or the country’s trade deficit, or the government’s policy on taxation. Indeed, Mr King claimed that had the MPC raised rates significantly, “inflation might well have started to fall back this year, only because the recovery would have been slower, unemployment higher... The erosion of living standards would have been even greater”.
It was reiterated that the MPC’s remit was being stuck to, that inflation was likely to be well above target for a few months but it had not abandoned its commitment to reducing inflation to 2%. So it came as a surprise earlier this week, when Mr King in his letter to the Chancellor explained that inflation was equally likely to be above or below target in the medium term “under the assumption that Bank Rate increases in line with market expectations.”
Whilst many were more entertainingly engaged in the game of listing all the goods that were soaring above the 4% rate of inflation [car insurance: up 29%, fruit: up 12%, mineral water: 12%
(what exactly is wrong with tap water anyway?), coffee, tea and cocoa: up 8.4%], markets were busy pricing in a rate hike by May. The prices of Short Sterling futures contracts indicate that the market is expecting a 1% rate rise by the end of the year. Many reputable economists read the key phrase, highlighted above, as the Bank of England’s endorsement of market rate expectations.
In another turn of events, in Mr King’s opening remarks which accompanied the release of the Inflation Report, he indicated that he may be in no mood to change the inflationary approach to adjust the living standards post-crisis. Admittedly he did so via a humorous quote – something about a futile gesture and war, which flew past my head and had to be explained to me.
No matter how one reads Mervyn King’s statements, there is no denying that an increasing voice of dissent is being heard amongst the MPC. The inflation outlook suggests that it is likely to remain high throughout 2011 and in the medium term the committee expects the chances of inflation being above or below target to be broadly equal. The risk now is that when policy tightening does start, the Bank of England will be behind schedule and more focussed on playing catch up. If the recovery prospects are not smooth now – as Q4 2010 GDP indicated - then a steep course of rate hikes is hardly likely to alleviate matters.
Whether you fall into the hawk or dove category with regard to inflation, it appears that Mervyn King is reluctant to give away any indication of his personal stance – as he signed off his letter to the Chancellor with a frustratingly non-committal “Only time will tell”.
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And finally... In these days of austerity - which we are, of course, all in together - there still remains the lingering suspicion that some aspects of government and local authority spending are not perhaps under the most stringent of controls. Occasionally those feelings are confirmed. Such an occasion would be the story from Surrey identifying that the council has been regularly changing a light bulb in a streetlamp. ‘Bravo!’ you cry, ‘such attention to detail must be commended and praised!’ However, this is somewhat mitigated by the fact that the streetlamp is not actually connected to an electricity supply. So far it has been changed four times – presumably because someone has spotted that it isn’t working. When the good burghers of Dorking receive their council tax demands later in the year, the heat and light generated might remove the need for the bulbs altogether!
Aparna Ram Investment Analyst Seven Investment Management