–Bean Sees Risks To Inflation In Both Directions
–More Likely Than Not Spare Capacity Will Weigh Down On Inflation
–Bean: Won’t Hesitate To Act If Infl. Expectations Threaten CPI Target

LONDON (MNI) – Bank of England Deputy Governor Charles Bean warned
against falling for the “false promise” of higher inflation, saying it
was “misguided” to think that extra inflation would be a good thing.

In an opinion piece in the Daily Telegraph Bean said while
inflation has the “dubious” ability to reduce the public and private
debt burden, allowing inflation to rise could well have unpalatable
consequences.

Bean said past experience shows “a bit of inflation has a nasty
habit of turning into a lot of inflation.”

Also, high inflation would distort market signals and “inhibit the
efficient working of the economy”, Bean said.

This would fuel doubt over an “already uncertain economic outlook”,
he said.

Bean said the BOE’s Monetary Policy Committee would contribute most
to the recovery by bringing inflation back to the target rate of 2% in
the medium term.

He admits that inflation has turned out higher than the BOE
expected. Consumer prices in the UK rose 3.7% in April compared to the
same period last year according to the official data.

Rising oil prices and the depreciation in sterling have driven up
inflation, with the latter’s impact on prices greater than the BOE had
allowed for, Bean said .

Sterling and oil effects, however, cannot fully account for the
resilience of inflation.

“Once all these factors are taken into account, inflation has still
been higher than might have been expected,” Bean said.

A reduction in supply capacity following the credit crunch may also
be a factor.

“Part of the explanation could be that the credit crunch has
resulted in more loss of supply capacity than anticipated. Also,
businesses seem to have opted to maintain profit margins and cash flow
against a background of reduced credit availability, rather than cut
prices to boost sales,” he said.

Bean said at present there were both upside and downside inflation
risks and he stuck to the BOE’s central view that spare capacity should
bring inflation back down.

“While the exact margin of spare capacity in the economy must be
open to debate, at this early stage of the recovery it is more likely
than not that this will bear down on inflation for some time,” Bean
said.

Also “there remain considerable downside risks to the recovery,
which have been brought into sharp relief by heightened concerns about
public deficits and sovereign debt.”

Bean noted the OECD has called on the BOE to tighten policy this
year to combat inflation. The BOE Deputy Governor acknowledged there
were risks of high inflation becoming entrenched.

“There is no room for complacency. Elevated inflation can persist,
even with a substantial margin of spare capacity, if businesses, workers
and households expect inflation to be high and set prices and wages
accordingly,” he said.

“While some measures of inflation expectations have edged up
recently, pay growth remains at unusually low levels, below 2%,” he
said.

“We will be watching these indicators carefully and will not
hesitate to act should they threaten the return of inflation to the
target,” Bean warned.

–London newsroom: 4420 7862 7491; email: ukeditorial@marketnews.com

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