Sentance: inflation may soar as MPC loses focus

Tim Wallace
Follow Tim

uo;THE EUROPEAN Central Bank (ECB) has delivered price stability. That is good for the economy and good for jobs,” boasted outgoing ECB boss Jean-Claude Trichet yesterday.

The same cannot be said in the UK, where CPI inflation hit 4.5 per cent in August and is expected to rise to more than five per cent in late November.

Yesterday’s announcement of further quantitative easing (QE) prompted anti-inflation protests (pictured right) outside the Bank of England.

Former monetary policy committee member Andrew Sentance is also concerned. “This is a risky move which can only be justified on the basis of the MPC’s forecasts – which have significantly under-predicted inflation in the past,” he told City A.M.

“In the current circumstances, QE will do little for growth and may fuel inflation by pushing down the pound. It reinforces the widespread view that the MPC has lost its focus on price stability and the inflation target.”

However, the Bank claims inflation will fall sharply in the first half of 2012 and governor Sir Mervyn King said this is why an inflationary policy like QE2 can be implemented.

“In order to keep inflation on track to meet the target over the medium term, the MPC judged it was necessary to inject further monetary stimulus into the economy,” Sir Mervyn said.

Consumers’ expectations point in a very different direction, however.

The most recent survey from the Bank, taken in August, showed inflation expectations of 4.2 per cent over the next 12 months. In five years’ time, respondents expected inflation to stand at 3.5 per cent.

However, the MPC dismissed these concerns, claiming in last month’s minutes that expectations follow actual inflation and so will drop if inflation falls in 2012.