Mervyn King also said the Bank expected inflation to remain high over the next year.
More important, however, current inflation rates matter far less to monetary-policy makers than does expected inflation.
In May, households surveyed by the University of Michigan expected inflation in the year ahead of 4.1%.
Both rates are far below expected inflation, making real interest rates sharply negative.
Asian indexes closed with losses after China released greater-than-expected inflation data, potentially signally further monetary tightening and anti-inflationary measures in the PRC.
In his written response, the chancellor noted that most independent forecasters expected inflation to return close to the 2% target by 2012.
Following the lead of Thomas Hoenig, Kansas City Fed chief Esther George warned QE3 and ultra-low rates could spark higher than expected inflation.
"November's lower than-expected inflation data keeps the door open for another interest rate cut early in 2008, " said Global Insight economist Howard Archer.
Last month, Matthews Asia fund manager, Richard Gao, told Forbes that he expected inflation pressures in China to ease by the second half.
Even if China were to produce lower than expected inflation numbers on Friday, lackluster news from Europe will trump the better news in China.
Beijing, in turn, shows little sign of budging on the yuan, even though the latest figures show surprisingly strong export growth and higher-than-expected inflation.
Bonds pay interest based on the expected inflation rate until maturity, plus a fair risk premium over inflation based on the riskiness of the bond.
In Italy and Spain, wage growth is picking up even as unemployment rises, because of contract clauses allowing workers to be compensated for higher-than-expected inflation.
Higher-than-expected inflation could raise concerns that Beijing will start monetary tightening.
The Bank of England said in its latest inflation report on Wednesday that it now expected inflation to remain above its 2% target for two years.
Slightly higher than expected inflation data suggests that some of the pull-back in spending may be a result of higher prices that are being passed to the consumer.
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Not only must investors regard assets in different countries as perfect substitutes, but expected changes in exchange rates must also equal the expected inflation differential between two countries.
If five-year Treasury bonds are yielding 1.25%, as they were on November 2nd, then a negative 0.55% real yield on inflation-linked bonds implies an expected inflation rate of 1.8%.
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In the market for Treasury Inflation Protected Securities, where investors make bets on future inflation, expected inflation in five years has fallen to about 2.2% from near 3% in April.
Such a rate, they suggested, could lie anywhere between 4.5% and 6.5% ie, the sum of expected inflation of about 2.5% and a real interest rate of between 2% and 4%.
However, John Longworth, director general of the British Chambers of Commerce, said he expected inflation to rise in the near term, as further rises in utility and food prices kicked in.
They can do nothing to avert damage to the wider economy: on Friday, the central bank said it expected inflation this year to be 12%, up from a pre-crisis forecast of 9.5%.
This forecast is considerably higher than the one Mr King made three months ago, when he told the chancellor that he expected inflation to rise above 4% in the second half of 2008.
He also expressed disappointment at higher-than-expected inflation, which stands at 2.7%, but reiterated the Bank's belief that the rate would come back down to its target rate of 2% over the next two years.
The Cleveland Fed inflation estimates, based on financial market data including the interest rate spread between ordinary and inflation-protected Treasury bonds, show expected inflation of 1.4 percent per year over the next ten years.
Real interest rates equal nominal interest rates minus expected inflation, so with CPI averaging about 3.5% this year according to Winmill, at 2-year Treasuries at yielding 0.431%, real rates are actually negative, explained the fund manager.
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Expected inflation looks tame, too (see chart).
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The latest statistics say that while the economy is, if anything, proving stronger than expected, inflation remains surprisingly tame.
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But higher-than-expected national inflation rates have led some to speculate that the European Central Bank (ECB) might be tempted to raise interest rates next month.
In this case, the stalled economic recovery got back on track, the euro-zone debt crisis faded into the background again, the stock market recovered from its summer correction, and although still expected, inflation had not shown up.
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