McCafferty insists MPC is not ‘more tolerant’ of inflation

The Bank of England has not become more tolerant of rising prices, monetary policy committee (MPC) member Ian McCafferty said today, although he admitted that inflation is likely to remain above the Bank’s 2 per cent target “until at least the end of next year”.

Speaking at an event in London, the former chief economic adviser to the CBI said it was a “good thing” that anyone under the age of about 45 would not have an “adult memory” of high inflation.

“But it also means that there is a risk that the low and stable inflation of the past two decades is now being taken for granted,” McCafferty added.

Having averaged more than 7 per cent between 1970 and 1972, inflation reached almost 27 per cent in late 1975 as oil prices soared, and did not return to consistent single-digit rates until 1982.

Inflation, as measured by the consumer prices index, eased to 2.4 per cent in April, from 2.8 per cent the previous month, on the back of lower petrol prices and air fares, although economists fear it could start rising again.

Howard Archer, chief UK and European economist at IHS Global Insight, said: “The recent overall marked retreat in oil and commodity prices, suggest that inflation is likely to peak close to 3 per cent this summer rather than 3.5 per cent and it should start to fall back from the autumn.”

McCafferty said that the recent combination of above-target inflation and depressed economic activity “is possibly the worst such trade-off faced by the MPC in its 15-year history”.

He added: “Greater sensitivity to short-term inflation news could suggest that expectations are becoming less anchored than they have been, and that markets perceive that the MPC has become more tolerant of inflation.

“This is certainly not the case, though it would be easy to see why some might think so, given the recent history – inflation having overshot the target for the past three years and not expected to return to target for much of the next two.”