By David Milliken

LONDON (Reuters) - Britain has a bigger inflation problem than the United States or the euro zone, with both large headline price rises and growing signs of persistence in underlying pressures, Bank of England policymaker Catherine Mann said on Wednesday.

Mann, who has been the BoE's keenest advocate of interest rate increases since she joined in 2021, also saw a risk of future financial market volatility as the global economy adjusts to higher borrowing costs.

British consumer price inflation hit a 41-year high of 11.1% in October and in April, at 8.7%, was the joint highest alongside Italy's among the world's big advanced economies, sparking a sell-off in bond market as investors bet on more BoE rate rises.

Core inflation - which excludes volatile food and energy prices, and which Mann said was a better guide to future inflation trends - rose to its highest since records began in 1992 at 6.8% last month.

Mann said core inflation was showing signs of being kept high by British businesses' ability to push through price rises, as well as increased wages, while headline inflation had also been slower to fall back towards the core rate than elsewhere.

"The gap (between headline and core CPI) that I have in my country is more persistent than the gaps that we see in either of my neighbours, the U.S. or the euro area," Mann said in a policy discussion hosted by Swiss asset manager Pictet.

"There is a gap between the headline, which is incorporating energy which went up really high and now has come down, and core where we do start to see the implications coming through pricing channels, through wage negotiations, into something that is persistent," she added.

Left-over savings from the COVID-19 pandemic had increased British households' ability to absorb companies' price rises, while an increased minimum wage, which rose 9.7% in April, might have had knock-on impacts further up the pay scale, Mann said.

The BoE has raised rates 12 times since December 2021, taking them to 4.5% this month. Markets expect them to reach 5.5% later this year after last week's stronger-than-expected inflation data.

BoE Governor Andrew Bailey and other top officials at the central bank have said they will respond if there are signs of persistently strong inflation pressure.

Mann also flagged a tension between the long-term level of interest rates needed to control inflation and the level needed for a stable financial system, which could bring "an awful lot of volatility" for exchange rates, asset prices and inflation.

"The metaphor that is appropriate here ... is: 'The water is calmest before the falls'," she said.