–Not Difficult To Understand Why CPI Above Target
LONDON (MNI) – The Monetary Policy Committee is concerned that
inflation has been running above the committee’s 2.0% target, although
it is not difficult to explain why it has, Bank of England Governor
Mervyn King said in evidence to the House of Lords Economic Affairs
Committee Tuesday.
King was questioned about the MPC’s failure to predict the strength
of inflation, but he argued the BOE’s forecasts should not be thought of
as spot predictions. King, speaking after the latest data showed CPI
came in at 3.2% in October, said the worry was that elevated inflation
would feed through into higher inflation expectations.
“It is important not to think of forecasts as point estimates – as
“spot the ball” estimates where you are trying to guess the precise
number,” King said.
“It is of concern to us that inflation is above the target, has been
so for a number of months in the past three years but I don’t think it
is difficult to understand why,” he added.
“In fact there are many explanations that one could appeal to as to
why inflation is currently above target,” King said.
“We have seen significant increases in energy and commodity prices,
we saw VAT go up in January of this year, it is due to go up again in
January of next year and, of course, perhaps most important of all, the
effective exchange rate for sterling has, on average, fallen by 25% from
the period in the middle of 2007 to the end of 2007,” the BOE head said.
King said a fall of this scale for sterling would “in and of itself
add about 6 percentage points to the price level which, spread across
say three years, would be roughly 2 percentage points on the inflation
rate.”
“In the medium term we would certainly hope and expect to bring
inflation back to as close as we can to the target. In the short run,
the real question is why has it been above target and I don’t think it
is difficult to understand why,” he said.
–London newsroom 0044 20 7862 7491; email: drobinson@marketnews.com
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