Does Britain’s Inflation Target Still Make Sense? – OpEd |
By Damian Pudner
For much of the decade before the Covid pandemic, Britain’s inflation problem was its absence. Prices rose too slowly. Policymakers fretted about deflation, secular stagnation and the limits of monetary policy. Interest rates hovered near zero. Quantitative easing was deployed not to restrain demand, but to stimulate it—often with disappointing results, unless you happened to own property or financial assets. Hitting the Bank of England’s 2% inflation target looked less like a ceiling than a distant aspiration.
That world has gone.
Consumer price inflation rose to 3.4% in December, its first increase in five months, driven not just by base effects but by higher tobacco duties, airfares and stubbornly high food prices. More worryingly for the Bank, annual average public sector pay growth is now running at 7.9% compared to 3.6% in the private sector.
Britain now finds itself in an awkward position. Inflation remains above target and appears structurally harder to bring down, even as other macroeconomic indicators and surveys suggest policy should be eased. At the same time, the structure of the public finances means that both higher inflation and higher interest rates are fiscally painful. This combination was not anticipated when inflation targeting was conceived in the early 1990s. It should prompt a more pressing concern: whether a 3% target now better reflects Britain’s economic reality.
Walter Bagehot once observed, not entirely approvingly, that since Britain had acquired a central bank, it should at least........