Should banks be given inflation targets?

[Kristina Burns]

Was it inappropriate to give central banks an inflation target that looked only at consumer prices, not asset prices and were they wrong to believe that low global inflation was the result of their monetary management?

[Blue Peter]

Was it inappropriate to give central banks an inflation target that looked only at consumer prices, not asset prices and were they wrong to believe that low global inflation was the result of their monetary management?

An acquaintance of mine has quipped that it is unbelievable that the tool for measuring something so important as inflation, should be a shopping basket!

It would be interesting to look at the CPI or RPI if they'd actually put house prices in with a weighting of something like 10%. I suspect that we'd be in a lot better shape.


And finally, it's pretty clear that low inflation was due to the arrival on the scene of about 2 billion people willing to work for not a lot. I suspect that history will tell a very different story from that which the major actors were telling themselves all the way through - though it's hard to imagine that some major players didn't understand what was going on,


Peter.

[Martin Upton]

My understanding is that the focus of the Bank of England's Monetary Policy Committee (MPC) on a price inflation target (currently CPI of 2% p.a over the medium term) does contrast somewhat with the objectives of the US Federal Reserve (the 'Fed') and the European Central Bank (ECB) where, in addition to the control of price inflation, emphasis is also placed on other macro-economic objectives like economic growth. Infact to ge fair to the MPC I think that their brief does extend to such other economic objectives - and perhaps this has been demonstrated by policy action since last October - although clearly inflation control remains the paramount objective.

[Blue Peter]

The remit of the BoE is:

• To support price stability (CPI at 2%)
• To support the economy policy of the government (high and stable growth)

E.g. Remit

It could be argued that the BoE did quite well with its remit whilst it was easy, but recently has had problems. CPI inflation has been consistently above target, and the BoE fan charts have failed to predict what is happening (they always come back to 2% two years out - presumably that's an input to the model, rather than an output),


Peter.