More interesting than the Governor of the Bank of England’s letter to the Chancellor explaining why inflation has exceeded the official target will be Gordon Brown’s reply. Mervyn King has admitted there is an even chance he will have to write the letter, and a prudent Governor would already be drafting it.
King might want to point out that although inflation is his responsibility — under the pact imposed on the Bank when Labour took office — it is nevertheless Brown who is responsible for some of the steepest price rises. While the private sector valiantly slashes the cost of electrical goods, clothing and food, the government allows council taxes to soar while the so-called regulated prices for services from rail fares to water are permitted to rise at above the rate of inflation, thus pulling up the inflation rate with them.
Of course, there are other pressures on costs, not least energy prices, but King might even push his luck by asking what the prolonged conflict in Iraq has done to keep down prices. One of the myths of the Left was that the war was all about oil — an attempt by America to grab Iraq’s reserves. If only that had been true: the surplus supply would now be depressing world prices. As it is, Iraq is mired in war, production is stalled and the rest of the Middle East has no wish to help the West by increasing output.
But if that’s a little too political for King, his letter should stick to interest rates. He may point out to Brown that the Bank raised rates this month to dampen inflation, but that the increase would not have been necessary had the Monetary Policy Committee not outvoted the Governor to cut rates in August last year.
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