What he actually said:

Dear Chancellor,

As I have described in previous open letters, three factors can account for the current high level of inflation: the rise in VAT relative to a year ago, the continuing consequences of the fall in sterling in late 2007 and 2008, and recent increases in commodity prices, particularly energy prices…

Inflation is likely to continue to pick up to somewhere between 4% and 5% over the next few months, appreciably higher than when I last wrote to you. That primarily reflects further pass through from recent increases in world commodity and energy prices. The MPC’s central judgement, under the assumption that Bank Rate increases in line with market expectations, remains that, as the temporary effects of the factors listed above wane, inflation will fall back so that it is about as likely to be above the target as below it two to three years ahead. The MPC judges that attempting to bring inflation back to the target quickly risks generating undesirable volatility in output and would increase the chances of undershooting the target in the medium term.

As I noted above, members of the Committee hold differing views about the risks to inflation in the medium term. On the downside, the main risk is that the substantial margin of spare capacity will cause inflation to fall below target in the medium term. That risk could be exacerbated if growth in the economy is weaker than expected, for example if household saving is higher than expected. Opposing these downside risks, there are also significant upside risks to the medium-term outlook for inflation. The period of above-target outturns for inflation could cause inflation expectations to move up and thereby affect wage and price setting…

What he should have said:

For Pete’s sake, George,

We couldn’t even hit a barn door with our past inflation and growth forecasts and now you’ve put us right in the middle of one of the most front-loaded fiscal austerity experiments in British history. Of course we’re going to keep on fudging this stuff.

And oh yes, we’ve actually been secretly targeting 5 per cent nominal GDP growth throughout the crisis.

Sorry for not telling you earlier.

TTFN,

Merv

Related links:
Dear Chancellor… – FT Alphaville
The Bank of England’s big dilemma - FT Alphaville
The pre-emptive UK rate hike – FT Alphaville

This entry was posted by Joseph Cotterill on Tuesday, February 15th, 2011 at 10:51 and is filed under Capital markets. Tagged with bank of england, deleveraging, inflation, interest rates. Edit this entry.