Don’t worry! The Bank of England has it all under control

I was amused to read the recent UK inflation reports. The ONS said that in July it “fell” from 3.2% from 3.1% in June.

The measurement of inflation in itself is absurd given its dependence on entirely subjective decisions about what should be included in the basket and in what proportions. In addition, a good today is often not strictly comparable with an equivalent good measured a year ago – this is particularly the case with respect to items subject to significant investment such as technology. I wonder how my marvellous new HTC smart phone is considered in the basket for example – such a product did not even exist 2 years ago.

How, therefore, can a reduction to inflation of 0.1% in a single month be regarded as anything other than an insignificant change?

More important I would say is that CPI is running at 3.1%, which is well above the Bank of England’s target of 2%. RPI (yet another measure of
inflation) is measured at 4.8%.

Meryvn King’s response to inflation running above target was most illuminating. When this happens, he is required to write a letter to explain the issues to the Chancellor of the Exchequer. Amongst the usual bilge (food went up by x, rail fares held steady at y), he gave us an insight into his likely future response to the inflation that cannot be hidden even by understated government statistics*. He stated that he would “write more letters to the Treasury over the coming months”.

And there we have it. Our irresponsible central bank’s role as a committed inflationist is confirmed.

* For an illustration of how governments have manipulated inflation statistics to suit their own purposes, take a look at the Shadowstats site, where John Williams has removed the government adjustments to maintain a consistent view of price inflation over the years. He thinks that as inflation used to be measured, it is running at somewhere close to 8% in the US and has been doing so for years.