Bank dove Adam Posen warns on deflation

Bank of England arch-dove Adam Posen today warned that the UK still faced a deflation threat as he put more distance between himself and his rate-setting colleagues.

Posen — who has called for the Bank to ratchet up its money-printing programme by £50 billion in recent months — said the cost of living could undershoot the Bank's 2% target "perhaps by 1% or more" in two years.

He believes inflation will be "well below" the Bank's November forecasts as households rein in spending and the economic slack caused by recession drags down prices.

The Bank's benchmark Consumer Prices Index is presently at 3.3% and set to push even higher next year as VAT hits 20%.

Despite Posen's warning, worries among rate-setters were heightened today after respondents to its latest survey said they expected the cost of living to reach 3.9% next year, up from 3.4% in August.

This is nearly double the Bank's target and deputy Governor Charlie Bean warned that high inflation had "pushed up" the risk of higher wage demands.