One of Britain's most prominent economists has said inflation could soar to as high as 5pc in the year ahead, warning that the Bank of England has lost control of prices.
http://www.telegraph.co.uk/
Tim Congdon: warning
Tim Congdon, the former adviser to Tory Chancellor Kenneth Clarke, said that it was foolhardy to presume that prices will only fall in the coming months.
He said it is possible that the Consumer Price Index, currently 2.8pc, soars to 4pc or even 5pc, warning that recent 16-year highs in the growth of money circulating around the economy pointed to higher inflation ahead.
"It has to be said that an inflation rate of 4pc-5pc in 2008 or 2009 would not be a surprising sequel to the burst of money growth seen since mid-2004," he said.
"As far as 2008 (and probably 2009) is concerned, the UK economy must either suffer a period of asset price weakness and beneath-trend growth or above-corridor inflation. That conclusion seems to me inescapable."
The warning will chill the City, which has become increasingly aware that high inflation is proving far more difficult to dislodge than the Bank of England's Monetary Policy Committee had at first assumed.
If Mr Congdon's prediction comes true, it will leave inflation at the highest level since Black Wednesday in 1992, when the UK was ejected from the Exchange Rate Mechanism.
Mr Congdon recently co-authored a letter with other economists warning that the Bank had underestimated the threat of inflation in part because it did not place enough emphasis on money supply figures.
Unlike the European Central Bank, the MPC's remit does not include specific mention of money growth.
The Bank predicted in its latest Inflation Report that CPI will fall back towards 2pc over the next two years. Mr Congdon's warning comes ahead of the Bank's latest rate-setting meeting this week.
A growing number of economists have warned that the Bank could lift rates to 5.75pc in an attempt to put the lid on inflation.
Markets expect rates to climb up towards 6pc by the end of the year, but Mr Congdon warned that they could head much higher still.
The Bank of England has lost control of prices
Started by
Insider
, Jun 05 2007 01:57 AM
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