George Osbourne's Full Reply to Mervyn King's UK Inflation Letter

By: Nadeem_Walayat

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.

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

By Nadeem Walayat

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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

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