On the CPI measure, inflation hit 3.7% - well above the target of 2% and the highest rate since November 2008; whilst on the RPI measure, which includes housing costs, inflation was up to 5.3% - its highest rate in 19 years.

You can find the Bank of England Governor’s first letter to the new chancellor here; and the new Chancellor’s first reply here

In the reply, Osborne clearly refers to the issue of fiscal credibility and newly established Office for Budget Responsibility, as well as the view that housing costs are likely to be included in the CPI in the future.

Also it is noteworthy that the latest Bank of England Inflation Report admitted, inflation has been above the 2% target in “all but six of the past 30 months”.  As Stephanie Flanders writes here, its not always a problem for the government - inflation erodes the real value of debt as well as cause some fiscal drag, which benefits the government’s fiscal position.

On her blog there is also a nice graph showing quite starkly how the UK’s inflation rate has been consistently higher than the Euro area’s, highlighting structural differences between to the areas, as well as convergence criteria issues for the future.

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AS Microeconomics Revision Guide

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