Britain should not look at rising inflation as a way of cutting its public debt, Bank of England Deputy Governor Charles Bean said, adding the central bank would not hesitate to take action to bring it back to target, according to Reuters. Bean said inflation had been surprisingly high because of the jump in oil prices and that the impact of the sharp fall in the pound had been greater than policymakers had allowed for. He said businesses had also opted to rebuild margins rather than cut prices to boost sales volumes. "Some people have suggested that a bit of extra inflation now might actually be a good thing. After all, wouldn't it help to get the economy going by reducing the real value of public and private debt?" Bean wrote in Friday's Daily Telegraph. "This is misguided. Aside from the dubious morality of redistributing wealth from savers to borrowers, we have seen from past experience that a bit of inflation has a nasty habit of turning into a lot of inflation," he wrote. Consumer price inflation jumped to a 17-month high of 3.7 percent in April -- almost double the BoE's 2 percent target -- and obliging BoE Governor Mervyn King to write a letter to the government explaining why that was the case. But the central bank forecasts inflation will fall back to target around the end of this year, as the government's fiscal tightening and the slack in the economy keeps a lid on prices as Britain recovers from its deepest downturn since World War Two. And most economists reckon the BoE will therefore keep interest rates at their record low of 0.5 percent until at least the end of this year. But minutes to last month's rate-setting meeting suggested some policymakers are getting worried about price pressures. "On the whole, today's comments do not add materially to our current thinking on the policy outlook; they are, however, slightly less dovish than other recent communications from the MPC," said Varun Bhabha, UK economist at Barclays Capital. RECOVERY RISKS Bean said there were both upside and downside risks to inflation. On the downside, the restoration of value added tax at the start of this year and the rise in oil prices would fall out of the inflation rate over the course of the year if they were not repeated, he said. In addition, the spare capacity in the economy was more likely than not to bear down on inflation for some time. "Moreover, there remain considerable downside risks to the recovery, which have been brought into sharp relief by heightened concerns about public deficits and sovereign debt," he wrote. But rising inflation expectations posed an upside risk. "Elevated inflation can persist, even with a substantial margin of spare capacity, if businesses workers and households expect inflation to be high and set prices and wages accordingly," Bean wrote, noting that wage growth was still "unusually low".
