If Policy Isn't Inflationary, 'I'm a Banana': Economist

Inflation has been rising fast in the UK, with a big budget deficit and the Bank of England's quantitative easing policy being blamed by some analysts for it.

Sharon Lorimer

Data released Tuesday showed a weaker than forecast rise in inflation for May, of 3.4 percent year-on-year, but some believe this will not last.

Liam Halligan, the Chief Economist at Prosperity Capital Management has been worried about inflation for years and warns investors it could get worse from here.

"This really is economics 101… We're running a budget deficit of 12-13 percent of GDP, if that's not inflationary I am a banana," Halligan told CNBC.

"Inflationary expectations start to spiral once inflation is above a significant level," he added.

Bond investors know this and are very worried about the health of Britain’s finances, Halligan warned.

"The budget deficit in the UK is set to double to £1.5 billion by 2015 and the bond market knows this," he said.

While the new coalition government is working on cutting the deficit, the problem is the total size of the debt, according to Halligan.

"Britain’s tax base is weak as financial services, North Sea oil and the housing market are under considerable pressure," he explained.

The bond market is being held up by the banks who, Halligan said, are being forced by the government to buy Gilts in return for the support they got after the financial crisis.

"The whole market knows the British Government has to unload an unprecedented amount of Gilts," he said.

- Watch the full interview with Liam Halligan above.