The likelihood is that there will be volatility, and lots of it, although it seems fairly clear that prices are going to rise over the next few months, and perhaps quite sharply, before the inflation rate eases back later in the New Year.
Faced with this, the awkward issue for the Bank is that its means of controlling inflation (an increase in interest rates) appears to have been denied it by economic circumstances.
To keep a fragile recovery on track it may actually be necessary to continue injecting money into the economy regardless of the inflationary effects. As a result, it is almost certain that sooner or later the Consumer Prices Index (which excludes housing costs) will breach the 2 per cent target and go on from there. So Mr King looks to have little option other than to cross his fingers and start writing those letters to the Chancellor, Alistair Darling, that are required when it reaches 2.5 per cent. He’ll probably have to say there’s not much he can do. And he’ll probably have to write to him again, (and again). No wonder he’s been so cross with the banks that have got him into this situation in recent weeks.
Not that said Chancellor is likely to worry too much. In previous eras the favoured method of dealing with runaway government debt was to inflate it away over time. And given the debt he’s run up, Mr Darling might very well feel that a little inflation is not such a bad thing after all, particularly if it makes trouble for an incoming Tory administration.
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