Inflation, I presume


Now that UK inflation, measured by the Consumer Prices Index, has risen to 3.5 percent (up from 2.9 percent in December last year), Bank of England governor Mervyn King will have to write a letter to the Chancellor explaining himself. Needless to say, the whole thing has become something of a farce, but it does amuse me to imagine what King would say if he was being honest...

Dear Al,

As you are aware, the Bank of England recently printed £200m of new money. This new cash was used to plug your government's record-breaking budget deficit, and pumped into the economy via public spending. You also raised VAT by 2.5 percent at the end of 2009, pushing up retail prices. Are you really that surprised that we are seeing inflation?

Lots of love,

Merv x

It might also be worth noting that the Retail Prices Index, which is probably a more realistic measure of living costs since it includes housing, rose to 3.7 percent in January, up from 2.4 percent in December. Stagflation, anyone?