Tuesday, March 23, 2010

Inflation announced today

Here's another article I discovered via the various news feeds that the econ101b Twitter account follows: Uncertainty about today's inflation figures, from the Guardian.

Reading this should remind you of plenty we've looked at this term in econ101b.  First, why are inflation figures important?  Not least because low and stable inflation is one of the government's macroeconomic objectives, in order to provide an environment that facilitates investment and economic growth.  We've talked about the ways in which the government tries to achieve this: Monetary and fiscal policy, and we've also talked about the difficulty that the government has had in keeping inflation low historically.

Also, the government since 1997 has given this task to the Bank of England, which has been given independence to set interest rates to achieve an inflation target - current 2%, with a 1% band either side of this.  If the Bank misses the target then it's obliged to write to the Chancellor explaining why the target has been missed, and when inflation will fall back in line.

Inflation is forecast to be announced (today) to have been anything between 2.8% and 3.6% for the last month, and of course this matters: Less than 3% and a letter is avoided.

What's caused this wide range of forecasts?  The Guardian suggests that normally things are a bit more clear than this.  Various factors, many of which we've touched upon:
  • What will the effect be of the VAT return?  Will firms pass it on in prices?  Or try to woo customers?
  • How much will rising petrol costs affect inflation?  Recall this relates back to the exchange rate depreciation.  Most of our oil is imported, hence it costs more with the weaker pound.
  • Energy bill cuts via British Gas - many people use British Gas hence this might have a negative effect on inflation.
Either way, we'll have to wait and see...

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