UK Annual Inflation Jumps, Prompts Bank Of England Explanatory Letter

Quantitative easing (= creating money out of thin air = printing money = increasing the money supply = creating inflation.) works!

Inflation is a hidden tax on monetary assets.

“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
– John Maynard Keynes

Rise in value-added tax had ‘significant impact’ on CPI


LONDON (MarketWatch) — British consumer prices in January rose 3.5% compared to the same month last year, requiring Bank of England Governor Mervyn King to pen an explanatory letter to the Treasury.

The Office for National Statistics said a rise in the value-added tax back to 17.5% in January after the expiration of a temporary cut to 15% had a “significant impact” on the inflation rate.

The outcome was hardly a surprise. King, in a news conference last week following the release of the central bank’s latest quarterly inflation report, had once again highlighted expectations for a near-term surge in inflation driven in part by the expiration of the VAT break. Read about the BOE’s inflation expectations.

In an open letter released after the data, King wrote that that the Bank of England’s Monetary Policy Committee expects the January rise in annual U.K. consumer inflation to be a “temporary deviation” from the 2% target. King said the situation was comparable to two previous occasions when he has had to pen letters to the chancellor explaining missed targets.

Weak spending has created a “substantial margin of spare capacity” in the economy that is expected to bear down on inflation over time. King said the MPC is committed to taking “whatever actions are necessary” to ensure the inflation outlook remains in line with the 2% target.

King is required to write a letter to Chancellor of the Exchequer Alistair Darling if inflation misses the 2% annual target by more than a full percentage point.

In a reply, Darling noted that the MPC’s remit allows it to “look through short-term movements in inflation” and said the committee’s long-term outlook for inflation is similar to the forecast set out in the Treasury’s December Pre-Budget Report. Read the letters.

The ONS said consumer prices fell 0.2% between December and January, the smallest decline on record.

Economists surveyed by Dow Jones Newswires had forecast a 0.2% monthly rise and a 3.7% year-on-year increase.

The British pound rose 0.2% versus the U.S. dollar to change hands at $1.5693.

In last week’s inflation report, the BOE projected inflation would fall back below target in coming months after a temporary spike higher.

“While the inflation numbers look worrying at first glance, “we do buy the BOE view that the inflation rate will dip over the remainder of the year,” said Peter Dixon, U.K. economist at Commerzbank.

The VAT expiration was a one-time event, while the inflationary impact of a weaker pound was mainly an issue for 2009, Dixon said, with import prices stabilizing after a surge in late 2008.

William L. Watts is a reporter for MarketWatch in London.

Feb. 16, 2010, 6:33 a.m. EST
By William L. Watts, MarketWatch

Source: MarketWatch

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