Inflation above target, the governor writes another letter, we have the real version!

CPI service sector inflation has averaged 3.6% for the last sixteen years and the 2% target rate has only been achieved by an extremely flattering 1% rate of goods inflation. This of itself a function of a relatively high sterling exchange rate, an undervalued Renminbi and cheap products from the Asian block. Such facts are unhelpful in our model understanding of the way the world really works.
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UK inflation rises to 4% – the hawks are circling, will rates have to rise?

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Inflation CPI basis in January increased to 4%, that’s twice the level of the Bank of England target. The Governor has had to write yet another letter to the Chancellor explaining why the MPC was failing in the challenge to curb inflation. In his letter to the Chancellor, Mr King said three primary factors were behind the increase, the fall in sterling, the rise in VAT and recent increases in the prices of commodities, particularly energy. The Bank of England is running out of room and stretching credibility. Views within the MPC are polarising. The dependence on “gapology” is anachronistic. Two hawks are on the panel already but more doves will morph before too long. If the first quarter GDP figures are as strong as expected, interest rates will rise as early as April or May.
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UK service sector inflation hits 4% in August, CPI basis,

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The output gap will have no bearing on overall inflation despite the antiquity of the Bank of England Inflation model. Inflation will remain above target unless base rates rise to impact on Sterling appreciation leading to a reduction in import prices levels. Even then a revised target of 2.5% would be difficult to achieve.
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Prime Minister Cameron suggests UK Base rates may have to rise

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The Prime Minister has issued a veiled hint that the Bank of England should consider taking action and raise interest rates. According to the Daily Telegraph.
David Cameron said that the rise in the consumer price index to just under 4% in April almost double the Monetary Policy Committee’s (MPC) 2pc target, was starting to concern him.
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Prime Minister Cameron suggests UK Base rates may have to rise

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The Prime Minister has issued a veiled hint that the Bank of England should consider taking action and raise interest rates. According to the Daily Telegraph.
David Cameron said that the rise in the consumer price index to just under 4% in April almost double the Monetary Policy Committee’s (MPC) 2pc target, was starting to concern him.
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UK Inflation rises to 5.3% in April masking downward price pressure. Some mask!

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The Bank of England clings to output gapology a variation of the defunct Phillips curve and the nomadic Nairu. The belief prices may be held low by weak growth and high unemployment and a gap in real versus trend output is history. It is time to say “Good bye to Gapology”. Interest rates will have to rise much earlier than current thinking suggests. JKA
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