Prices will soar for three more years says King

Tim Wallace
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GOVERNMENT policies are pushing prices up beyond the control of the Bank of England while a lack of supply side policies from the Treasury means consumers and firms are being given little hope of better growth in future, governor Sir Mervyn King claimed yesterday.

And he added monetary policy is becoming less and less effective at stimulating the economy further, meaning the government needs to help rebalance the economy to prepare the country for growth in future.

The outgoing head of the Bank launched the unusually strong attack on the government as he explained why inflation is still running well above its target – at 2.7 per cent in January, above the two per cent goal – and will stay high until 2016.

Sir Mervyn argued green energy policies are driving up energy prices while rising university tuition fees are having a bigger impact than expected.

Between them factors like those add a full percentage point to inflation, meaning the Bank would have to tighten policy unacceptably hard, hitting jobs for no good reason, he said.

“This makes our job more difficult in the short run, we have to deal with the consequences,” Sir Mervyn said.

“But it would be a mistake to push up unemployment to compensate for a short term rise in prices.”

And the Bank predicts it will be at least another two years before the economy grows back to its pre-crisis size, not because of deficit reduction but because of a lack of reforms.

“The government should put together a package of supply-side reforms to raise future income expectations and so raise consumer spending today,” he argued. The Treasury rejects Sir Mervyn’s analysis, arguing it has kept prices down by freezing fuel duty and helped by cutting corporation tax.