Mervyn King adamant that inflation spike is temporary
Mervyn King, the Governor of the Bank of England, has today reiterated his view that the 3.5% spike in the rate of inflation in January is temporary and will fall back in the short term. The rise from 2.9% in December to 3.5% in January caught many by surprise but factors such as an annual increase of 70% in the price of oil and a return to the traditional 17.5% VAT rate were short-term factors which added to the situation.
It will be interesting to see the contents of Mervyn King's letter to the Chancellor of the Exchequer, explaining why the rate of inflation has risen above the government's 2% target. He is likely to reiterate the facts that he commented on earlier this week although in reality the proof is in the pudding and we eagerly await February's inflation figures.
The UK economy is proving more and more difficult to forecast and while the rate of inflation is uncomfortably high at the moment it is thought that Mervyn King's forecast of a short-term reduction is correct. The alternative (that inflation is again out of control) would create a nightmare scenario for the UK government and could plunge the UK economy back into recession.
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