Old notions of high inflation 'won't help reduce British debt levels'
7% Price In Consumer At Highest Major Advanced Of June Among The Britain 8 Rate Had Inflation Economies,
High inflation will not help Britain's public finances in the same way as in the past because government debt is now more sensitive to changes in interest rates and prices, the chair of the UK's Office for Budget Responsibility has said.
Richard Hughes told the BBC that old notions of being able to inflate away high levels of public debt no longer applied.
The average effective maturity of British government debt had shortened from about seven years in 2008 to two years, Mr Hughes said, meaning higher interest rates now feed into the cost of government debt faster than in the past.
This largely stems from the Bank of England's quantitative easing programme through which it effectively replaced longer-dated government bonds with very short-term central bank reserves, linked directly to the bank's bank rate.
Secondly, about a quarter of Britain's government bond stock is linked to inflation — by far the highest share among major advanced economies — so the state increasingly compensates investors as consumer prices rise.
"What that means is that inflation rises don't actually help the public finances in our country in the way they used to," Mr Hughes said.
Britain in June had the highest rate of consumer price inflation among major advanced economies, at 8.7%.
"What we're seeing more recently is inflationary pressures becoming more embedded in the economy," Mr Hughes said.
British inflation reached historic peaks during the mid-1970s and remained high through much of the 1980s. The headline measure of public sector net debt as a share of economic output fell during that time from about 49% to 22% in the early 1990s.
• Reuters