High inflation in the UK worries the BoE, but preferred to deflation

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 and lower consumption of foreign goods.

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.

---