The Bank of England's chief economist has warned that inflation could soon start to rise if consumer demand is not contained.

Mervyn King says earnings growth "disappointing"

Mervyn King said the underlying rate of inflation, excluding mortgage interest, would rise as the one-off effect of sterling's recent appreciation wore off unless domestically-generated inflation fell.

Addressing the Building Societies Annual Conference in Bournemouth, Mr King said a slowdown in economic growth was not, in itself, "sufficient to hit the inflation target".

"The central issue for monetary policy is whether total nominal demand will slow sufficiently quickly to prevent retail price inflation rising when the favourable effects of a high exchange rate and lower commodity prices wear off," King said.

April rise due to Budget

In April, the underlying rate of inflation rose to 3% year-on-year, although Mr King said this was a result of changes to excise duty in the last Budget.

He said the impact of the excise duty changes would "drop out" of the inflation index in the third quarter, when the rate was likely to fall back towards its target level of 2.5%.

"This relatively optimistic short-term outlook reflects an extraordinarily benign inflation environment," he said.

But the 4.9% rise in average earnings in the three months to February was "undoubtedly disappointing".

He said it was too soon to judge how far the figures reflected the impact of higher bonuses this year than last, but the rate of earnings growth would have to fall back if the inflation target was to continue to be hit.

Mr King said the Bank of England had developed a measure of house price inflation which suggested that house prices increased by an annual 9% in fourth quarter of last year.

Hawkish comments

He also dismissed the "seriously misleading" trend by commentators to label members of the Monetary Policy Committee as "doves" and "hawks".

"As circumstances change, it is easy to imagine that the hawks shall be doves and the doves shall be hawks," he said.

"And over a five-year period, since each member of the MPC is trying to hit the same inflation target, I predict that it will be impossible to distinguish 'doves' and 'hawks'," he added.
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