Inflation rise temporary, says King

Last month's reversal in the VAT reduction saw inflation leap to 3.5 per cent in January
12 April 2012

Bank of England Governor Mervyn King has insisted a jump in inflation to 3.5% was "temporary" as the surge in January's figure triggered a letter of explanation to Chancellor Alistair Darling.

Mr King has to write a letter to the Chancellor in the event that inflation is more than 1% above the Bank's 2% target.

January's rate of 3.5% was the highest level for the Consumer Prices Index measure of inflation since November 2008.

In his correspondence, Mr King said: "Although it is likely to remain high over the next few months, inflation is more likely than not to fall back to the target in the second half of this year."

He said the increase in VAT back up to 17.5%, a 70% hike in oil prices over the past year and the effects of sterling's depreciation had all played their part in the inflation spike.

Mr King said the Bank's Monetary Policy Committee believed the rise was a "temporary deviation" from the target. He said that, in the longer term, the measure would be dragged lower by weak spending, which has created a "substantial margin of spare capacity within the economy". This has already been seen in weak wage growth, he added.

The Governor said the effects of the Bank's £200 billion quantitative easing (QE) programme to boost the money supply and record low interest rates would continue to aid the economy for some time. He said the MPC was ready to take "whatever actions are necessary to ensure the outlook is for inflation to remain in line with the 2% target".

Mr King also reiterated his comments last week that the QE scheme - which has recently come to a halt - could be restarted if needed. But he also said that, if inflation looked likely to rise above target in the medium term, monetary policy could be tightened.

In his response to Mr King's letter, Mr Darling said the inflation outlook was "subject to some uncertainty" as the world emerges from the "deepest downturn in modern times".

Mr Darling indicated that austerity measures were on the way in the coming years. He added: "Over the medium term, setting a credible consolidation path to ensure sound public finances is a key element of the Government's macro economic strategy, and it is essential for economic stability and the long-term health of the economy."

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