Summary
In his letter Mervyn King remarked that not only was it possible that he would not have to write another letter in three months time to explain why inflation was so high, but that his next letter could be one to explain why inflation had moved more than 1 % below the 2% target, Inflation has cooled since the September peak The surge in commodity prices was the main factor behind CPI inflation rising to a 16-year high of 5.2% in September, With oil prices having nudged $1 50 per barrel in July, transport and energy costs had risen sharply; housing costs which include electricity and gas bills -contributed 1 .7% to the annual inflation rate in September, compared with an average of 0.5% over the past ten years. Deflation on the RPI measure is likely, but it will be temporary As a result, we expect CPI inflation to drop back below the 2% target in the first half of 2009, reaching a trough of 0.6% in November, When the VAT rate is restored to 1 7.5% in January 2010 there will be a temporary rise in inflation rates but, with the output gap closing only slowly, we are likely to see CPI inflation quickly drop back below target and remain there for some time.
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Extract
Is the Uk Heading for Deflation?
The November inflation figures showed a further cooling in price pressures, though CPI inflation remained more than 1 % above the target for a seventh successive month, compelling the Governor of the Bank of England to write his latest letter ot explanation to the Chancellor. In his letter Mervyn King remarked that not only was it possible that he would not have to write another letter in three months time to explain why inflation was so high, but that his next letter could be one to explain why inflation had moved more than 1 % below the 2% target,
Inflation has cooled since the September peakThe surge in commodity prices was the main factor behind CPI inflation rising to a 16-year high of 5.2% in September, With oil...See the full content of this document
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