UK - Deflation is a worry that should keep central bankers awake at night, said David Blanchflower, a former member of the Bank of England's Monetary Policy Committee (MPC).

Speaking at the CFA Institute Annual Conference in Edinburgh, Blanchflower, who is currently the Bruce V Rauner professor of economics at Dartmouth College in the US, said the scale of the shock of the financial crisis had been underestimated.

"It is a once in a 100 years event," he said. "Bankers realised we had a Black Swan, but then there are two possibilities - either hyper inflation or hyper deflation. What keeps central bankers awake at night is the worry of hyper deflation, and that we are going back to the 1930s."

He also said central banks had missed the recession, making the biggest policy mistake since the Great Depression.

Even after the UK economy had entered recession in April 2008, the MPC was arguing that there would be no recession, looking at past data and making projections.

"One of the problems with central banking and forecasting is that you don't know where you are going, but it's worse than that - you don't know where you've been, either," he said.

Interest rates should have been cut well before October 2008, and quantitative easing should have started earlier, Blanchflower said.

"The question to ask is what kind of mistakes might the authorities make in the future," he added.

"Are we still faced with the potential for something horrible to happen? We are because nothing seems to have been learnt. Financial institutions seem to be doing largely the same things they were doing in 2008."

He also argued that fiscal austerity in the UK, where the government is cutting too deeply and too quickly, is a dangerous gamble.

Inflation is being driven by "transitory" factors that mechanically drop out of the index, such as VAT increases, a fall in the exchange rate and a spike in commodity and oil prices.

There remains a major risk of deflation around the world, especially if growth disappoints, he warned.