Mervyn King warns on inflation, criticises central banks

Mervyn King, the former governor of the Bank of England, has warned that fiscal stimulus measures and the erosion of central bank independence threaten a return to high inflation.

King said there were already signs of prices rising as Covid-19 restrictions are relaxed and economies open up. Some will probably be temporary but there are reasons to worry, he said in a letter to the Financial Times.

Monetary and fiscal stimulus measures are "out of all proportion to the magnitude of any plausible gap between aggregate demand and potential supply", King said. Central banks' silence on high growth rates of broad money is "deafening" and unfunded spending, as in the US, could stoke inflation, he added.

Central banks have also undermined their own independence by succumbing to political pressure to help fund deficits, promising unwisely not to tighten policy too soon and straying into political territory such as climate change, King said. These trends "all threaten to weaken de facto central bank independence leading to a slow response to signs of higher inflation", he said.

The Bank of England and the US Federal Reserve have both bought large amounts of government bonds to help fund Covid-19 support plans and have played down signs of inflation, saying policy would only tighten when there were clear signs of sustained recovery.

"It is a long time since inflation was a talking point and memories of an inflationary past are short," King wrote. "It is when central banks stop talking about inflation that we should be concerned."

His comments are an implicit criticism of the BoE's approach under current governor Andrew Bailey. The BoE's chief economist, Andy Haldane, has been a lone voice among BoE officials in warning graphically that inflation could take off. Haldane is leaving to run the Royal Society of Arts, Manufactures and Commerce.

King was governor of the BoE from 2003 to 2013, a period that included the financial crisis of 2007 to 2009. The BoE took bold action to support the economy after Lehman Brothers collapsed in September 2008 but King was criticised for letting the credit boom rip and a slow response earlier in the crisis.