Adam Posen has just finished speaking at the Society of Business Economists’ annual conference. He repeated regularly he was speaking for himself not the Bank of England or the Monetary Policy Committee. And his remarks were a breath of fresh air because he didn’t duck difficult issues nor assume them away. Two things stood out:

• Mr Posen’s conclusion that British inflation expectations are drifting up and neither one-off effects such as sterling’s depreciation nor higher commodity prices can fully explain the drift of inflation higher.
• British monetary policy is again walking on a tightrope, suspended above higher inflation on one side and a renewed downturn on the other, making monetary policy very difficult to set. This is likely to make it reactive not proactive and liable to large errors.

Rising inflation expectations Although many in the audience disagreed, Mr Posen’s argument on inflation expectations rested on the argument that Britain’s recovery has been broadly similar to other countries, but its inflation performance has been very different. This he argued was easiest to explain, not by sterling’s depreciation, but by persistent inflation overshoot and mildly adaptive inflation expectations the public hold, as the chart shows.

“The most logical and empirically reasonable explanation for inflation creep is some unanchoring of inflation expectations, caused by the series of above-target outcomes for UK inflation in recent years.”

In a welcome display of transparency, Read more