Best Financial Markets Analysis Article The following is the full text of George Osbourne's letter to Mervyn King in response to his Inflation excuses letter on the failure of the Bank of England to target CPI inflation at 2% and keep it below the 3% limit in yesterdays released data which saw UK inflation rise from 3.4% to 3.7% with the more publically recognised RPI inflation measure literally soaring to a 19 year high of 5.3% from 4.4% as detailed in yesterdays analysis (18 May 2010 - UK Inflation Hits New High of CPI 3.7%, RPI 5.3%).

Dear Mervyn,

CPI INFLATION

Thank you for your letter of 17 May on behalf of the Monetary Policy Committee (MPC) regarding today's CPI inflation figure, written under the terms of the MPC's remit.

I am grateful for your explanation of the current elevated rate of inflation, at 3.7 percent for April. A number of temporary factors have contributed to this elevated rate of inflation, including the VAT rate rise in January 2010 and high fuel prices. Clothing and footwear prices and duty increases for fuel, alcohol and tobacco have also contributed to the increase in inflation between March and April this year. The MPC's remit allows it to look through short-term movements in inflation and I note the Committee's view that the current elevated rate of inflation is expected to be temporary. I am sure that you will remain vigilant towards any upside risks to inflation, including the risks to inflation expectations, of any prolonged period of above target inflation.

I note that the MPC expects CPI inflation will fall back to target within a year. Thereafter, your letter states that downward pressure from the persistent margin of spare capacity will probably cause inflation to fall below the target for a period. The latest Treasury-compiled Comparison of Independent Forecasts is broadly in line with this view and shows the average forecast for CPI inflation at 2.1 percent in the fourth quarter of 2010 and 1.7 in the fourth quarter of 2011.

I welcome this opportunity in our exchange of letters to state clearly the Government's absolute commitment to maintaining price stability, and as Chancellor I will support the MPC's decisions and actions to meet the 2 percent inflation target as measured by the 12-month increase in the Consumer Prices Index (CPI).

As we have discussed, over the longer term I would welcome your views on how we might accelerate the process of including housing costs in the CPI inflation target.

For its part, the Government sees the reduction of the fiscal deficit and ensuring economic recovery as the most urgent issues facing the UK. It will be a priority for the Government to deliver a significantly accelerated reduction in the structural deficit over the course of this Parliament.

The Government has announced that it is committed to making savings

of £6 billion in non-front line services in 2010-11. As I announced yesterday, the great majority of these savings will be used to reduce the record deficit. I am grateful for your positive assessment of the advisability of these plans, which you provided at the Inflation Report press conference.

Yesterday, I announced that Sir Alan Budd will chair a new Office for Budget Responsibility (OBR), established on an interim basis, to make an independent assessment of prospects for the public finances and the economy before the emergency Budget due on Tuesday 22rd June. The Government's new macroeconomic framework will therefore combine the independent and transparent approach to monetary policy with a similarly independent and transparent assessment of the fiscal position.

By establishing fiscal credibility through an improved fiscal framework and early action to tackle the deficit, the Government's fiscal policy will therefore support the recovery and the goal of price stability. My aim is that fiscal policy will allow monetary conditions to remain supportive while maintaining low and stable inflation.

I am depositing this letter immediately in the libraries of both Houses and on the Treasury website.

Best Wishes

George Osbourne.

The letter clearly shows that the new Chancellor is still floating high at just being in the job! Instead of admonishing Mervyn King for his failure, Perhaps in 12 months time is inflation is still high he will have changed his tune, that is if the coalition remains in tact.

The Inflation Mega-Trend

The full implications of the unfolding inflation mega-trend including how to protect your wealth are contained within the Inflation Mega-trend ebook (FREE DOWNLOAD), which includes analysis and precise forecasts for:

Interest Rates
Economy
Inflation
Gold & Silver
Emerging Markets
Stock Markets
Stock Market Sectors and Stocks, including ETF's
Natural Gas
Agricultural Commodities
House Prices
Currencies
Crude Oil

The 109 page ebook is being made available for FREE, the only requirement for which is a valid email address.

Source: http://www.marketoracle.co.uk/Article19597.html

By Nadeem Walayat

http://www.marketoracle.co.uk

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on UK inflation, economy, interest rates and the housing market and he is the author of the NEW Inflation Mega-Trend ebook that can be downloaded for Free. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 500 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Nadeem Walayat Archive

Only logged in users are allowed to post comments. Register/ Log in

The Market Oracle is a FREE Financial Markets Forecasting & Analysis web-site.
(c) 2005-2024 MarketOracle.co.uk (Market Oracle Ltd) - Market Oracle Ltd asserts copyright on all articles authored by our editorial team and all comments posted. Any and all information provided within the web-site, is for general information purposes only and Market Oracle Ltd do not warrant the accuracy, timeliness or suitability of any information provided on this site. nor is or shall be deemed to constitute, financial or any other advice or recommendation by us. and are also not meant to be investment advice or solicitation or recommendation to establish market positions. We do not give investment advice and our comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to enter into a market position either stock, option, futures contract, bonds, commodity or any other financial instrument at any time. We recommend that independent professional advice is obtained before you make any investment or trading decisions. By using this site you agree to this sites Terms of Use. From time to time we promote or endorse certain products / services that we believe are worthy of your time and attention. In return for that endorsement and only in the cases where you purchase directly though us may we be compensated by the producers of those products.