Posen: the Bank has serious worries about inflation

The Bank of England’s Adam Posen fuelled the alarm over the stubbornly high cost of living today, as he warned of “serious” worries among rate-setters over inflation.

Speaking to the Evening Standard, his comments cap a week of poor news on the Bank’s fight against inflation as its official benchmark — the consumer prices index — registered its first rise in six months during March to 3.5%.

Posen — who, it emerged yesterday, has dropped his call for further quantitative easing after the Bank pumped an extra £125 billion into the economy since October — believes inflation will be back to the 2% target by the end of this year.

But the big concern for the Bank’s monetary policy committee is a measure of so-called “core” inflation which strips out indirect taxes like VAT and energy prices. This was 3% or higher throughout much of last year and remained at 2.8% in March. “The committee is taking this very seriously and we are actively discussing it,” Posen said.

He admitted the issue “has been weighing on my mind”, and added: “Of course, the inflation forecast is higher now than it was then precisely because rightly we did more QE.

“What is more challenging to my analysis, and more concerning for the economy, is that core inflation has plateaued for the last three months rather than trending down.”

The MPC’s job has been made even harder this year by rising oil prices, thanks to tensions over Iran’s nuclear programme, although crude made a welcome drop below $120 a barrel this week. Posen admitted to being baffled by the stubborness of core inflation.

“The obvious candidates normally for why inflation is up — either because you’re worried about our credibility or that there is some underlying price factor — are just not there. If it turns out this is a short-term hang before it comes down again, great, if it turns out it’s not, then I and everybody else has to rethink something.”

City economists do not share Posen’s confidence that the headline CPI will fall back to target this year and expect the Bank to revise up inflation forecasts next month. Deputy Governor Paul Tucker yesterday said inflation could linger above 3% into the second half of this year.

Posen added today that markets “should not have been surprised” by his decision to abandon the vote for more money-printing this month.

He said: “I never was an automatic vote for more QE — my votes are always based on my forecast. By definition, if quantitative easing has the desired effect to loosen monetary conditions, and I believe it does, there has to be some amount that is enough to return inflation to our medium-term target for any set of economic conditions.”