As expected, inflation has fallen to its lowest level for more than a year after the VAT rise was stripped out of the calculation. The RPI rate fell 0.9 per cent to 3.9 per cent and the CPI rate fell 0.6 per cent to 3.6 per cent (see graph).
The latter is still significantly above the Bank of England target rate of 2 per cent, so Mervyn King has had to write George Osborne a decidedly unromantic letter. But even with another £50bn of quantitative easing, it looks likely that inflation will be back on target by the end of this year as commodity prices ease and wage growth remains low.
Indeed, some on Threadneedle Street believe that further QE is essential to avoid a Japanese-style deflation spiral. Since many shops didn’t pass on the VAT increase until the end of last year’s January sales, there should be another steep fall in February.
For David Cameron and George Osborne, who describe themselves as fiscal conservatives but monetary activists, the fall in inflation is politically useful. It strengthens the case for further monetary easing, in the form of more QE and sustained low interest rates, to stimulate the economy in the absence of higher government spending.
Content from our partners
Related
