Tuesday, June 17, 2008
When Macro Man began scribbling down his thoughts in this space in September 2006, he didn't really know what to expect from the endeavour. As it's turned out, his daily scribblings have turned into a valuable part of his investment toolkit, both in terms of organizing his thoughts on a daily basis a well as interacting with other market participants across the world.
Now, he knows that central bankers across the world are faced with a real conundrum, namely how to address the twin trends of slowing growth and rising inflation. Fortunately, at least one will have the opportunity to "think with his fingers" and exercise his writing skills. Macro Man refers, of course, to the BOE's Mervyn King; the image to the left was taken this morning from the MM "Spycam" installed in the Bank's Threadneedle Street offices.
Yes, Merv the Swerve has been forced to write a letter to the Chancellor, thanks to today's CPI release. It should be published just after this post (and is now linked above), as a matter of fact. (As an aside, the temptation to use the simple salutation "Darling", as opposed to something more formal, must be nearly overwhelming.)
The rationale for the letter is today's CPI print in excess of 3%; in excess, for that matter, of every other CPI print since the summer of 1992. Readers of a certain vintage will recall what happened to the UK in that era after a prolonged period of high rates were used to prop up sterling and fight inflation.
Somewhat alarmingly, the old target measure of inflation, RPIX, printed nearly 2% above its erstwhile target of 2.5%. It will be interesting to read Mervyn's letter to a Chancellor who has, in the recent past, suggested that the Bank has room for further rate cuts. A change in target, anyone?
For the time being, the most likely outcome will probably see the BOE adopt the same policy as the Fed: Talk the talk, but try not to actually have to walk the walk.