Former Monetary Policy Committee member Andrew Sentance has warned the Bank of England over potential inflation risks, despite the current rate standing just below its 2 per cent target.
Writing in the Telegraph, Sentance says economic conditions now are similar to those which led to a period in the 1980s when inflation rose to 10 per cent and interest rates hit 15 per cent – largely because policymakers had not raised rates early enough.
While he accepts that “history never repeats itself exactly”, Sentance says there are “parallels” between current economic concerns and the situation immediately before inflation began to rise and Chancellor Nigel Lawson was forced to push up interest rates.
These include low headline inflation, a strong pound, a benign oil price environment, structural change in the financial sector and spare capacity in the economy.
Sentance says: “The present inflation rate of 1.9 per cent is only half a percentage point lower than the low point of inflation in the Eighties – 2.4 per cent – 28 years ago in August 1986. That was at the start of the “Lawson boom” which unfolded over the next three years and led to the early Nineties recession with inflation of 10 per cent and interest rates at 15 per cent.
“In the late Eighties, the government and the Bank took their eye off the inflation ball – which Nigel, Lord Lawson himself has subsequently acknowledged. A long period of high unemployment and the belief that there was plenty of spare capacity in the economy distracted the focus from the need to make timely rises in interest rates.”
He adds that it should be of “concern” to the MPC that CPI inflation has remained close to the 2 per cent target despite low wage inflation and other factors holding down price increases in recent months.