High Inflation in the UK Worries the Bank of England

(This is a adapted repost from Inflation Watch)

Bank of England (BoE) Monetary Policy Committee Member Adam Posen tells CNBC in an interview (see below or click here) that stubbornly high inflation is keeping the Bank of England members up at night. However, Posen prefers this situation to deflation (as all central bankers would). Slack in resource utilization is not having the same dampening effect it is having in other industrialized countries like the U.S. I would think the steady decline in the British pound has a lot to do with the high inflation rate, but Posen claims it is not a sufficient explanation. Note well that this depreciation is essentially what the BoE, or at least Mervyn King, has desired to kickstart economic growth in the UK through higher exports, lower consumption of foreign goods, and higher domestic demand.

The interviewer reminded Posen that the BoE was wrong about its inflation forecast going into 2007, and Posen accordingly refused to get nailed down on any timeline for a rate hike. He did note that if there is no clear inflation shock in the economy, then the BoE will have to assume that inflation expectations are too high.

Posen was also extremely skeptical that the partial recovery in housing prices in the U.K. would lead to another consumption binge. He thinks his fellow citizens have learned that housing wealth is not real savings. Time will tell. Plenty of economists here in the United States continue to treat housing wealth as savings.

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