City fears over Carney’s plan for high prices

 
Tim Wallace
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ECONOMISTS and campaigners hit out at the incoming Bank of England governor’s plans for the British economy yesterday, arguing that higher inflation would damage the economy rather than promote a recovery.

Mark Carney told the World Economic Forum that “the immediate priority is to ensure economies reach escape velocity,” and that there should be “tolerances” around the inflation target in a downturn.

But he raised fears that the long squeeze on incomes will continue under the new governor.

“High inflation could make growth worse by undermining consumer confidence,” government pensions adviser Ros Altmann told City A.M. “Inflation makes those with money spend less as they worry about the future, particularly with an ageing population.”

RBS economist Ross Walker said he fears higher inflation will not help.

“The objective is to nurture a recovery in real output,” he said in a research note. “Simply fuelling inflation would be macroeconomically destabilising and result in an unjust redistribution amounting to a breach of the state’s existing ‘contract’ to limit the erosion in the value of money to two per cent a year.”

Last week outgoing governor Sir Mervyn King warned that scrapping the inflation target risks pushing inflation expectations higher, itself creating more inflation.

And former policymaker Adam Posen said extra volatility in inflation would hurt the economy.

FSA head Lord Turner is set to make a speech on the future of the inflation target next month, and it is anticipated he will favour a change of target.