Inflation is high

Today it's been announced that inflation has hit 3.7%, way above the Bank of England's 2% +/- 1% target. Hence the governor of the Bank of England, Mervyn King, has had to send another letter to the Chancellor. Of course, for better or worse (I'd argue the latter), the Chancellor is now George Osborne, as a coalition government formed last week between the Tories and the Lib Dems: We are living in a ConDemNation - best pun I've come across yet.

King has many valid points about inflation and why it's high - the weak exchange rate, which if you recall, makes imports more expensive. And we Brits tend to consume many imports (not least fuel). But also, this time last year VAT was at 15%, and now it's back up to 17.5%, distorting the figures.

Interestingly enough, King expects inflation in 2011 to be below target, so to fall from its current level. This is despite the record government deficit (remember how the PSNCR feeds into the money supply and hence likely feeds into inflation), and also a likely further hike in VAT to about 20%.