What should be the inflation target?

Sometimes the media debate catches up with us. Admittedly this is something we have looked at for years and they are only doing it because a Prime Ministerial candidate and in particular the front-runner in the stakes has suggested it. From the Financial Times.

Foreign secretary Liz Truss, frontrunner in the race to become the next British prime minister, said she would look to change the Bank of England’s mandate to ensure it controlled inflation.
Speaking at a hustings of Conservative party members in Cardiff on Wednesday, she argued that inflation had been caused by “huge” supply side shocks after the pandemic and the Ukraine war and said she wanted to review the mandate of the central bank, which has a target of maintaining 2 per cent inflation.

Next we got this as well.

She told the event: “The best way of dealing with inflation is monetary policy and what I have said is I want to change the Bank of England’s mandate to make sure in the future it matches some of the most effective central banks in the world at controlling inflation.”

The latter part of that statement creates a little head-scratching as that presently is a very short list. Especially if we recall her past statements on this issue.

A candidate to succeed Boris Johnson as UK prime minister, Truss said late Sunday that the government needed to “look at best practice around the world” when determining the target of the BOE and cited Japan as an example. ( Bloomberg)

So the Bank of England should set a negative interest-rate, buy a lot more government bonds as well as lots of equities?  That part of the  plan has clearly not been thought through. Japan has low inflation in spite of the efforts of its central bank not because of them.

Also this is just plain wrong and you might reasonably think that the Financial Times would point it out.

Truss added: “The last time the mandate was looked at was in 1997 under Gordon Brown. Things are very, very different now.”

There have in fact been 2 main changes. The first came in 2003 when both the inflation measure ( RPI was replaced by CPI) and the target itself ( from 2.5% to 2%) were changed. That looks superficially to be a tightening but it was not as I have argued many times as 1.5% would have been required I think. The numbers right now highlight the issue with the RPI at 11.7% being some 2.3% higher than CPI at 9.4%.

Also in 2013 the then Chancellor George Osborne changed the balance by deemphasising the inflation target and raising the importance of supporting government policy. That may seem arcane but we have have seen an enormous deployment of monetary action followed by high inflation. So it turns out that our supposed  guardians have helped create the inflation.

Inflation Mandate Changes

Firstly let me remind you that there is no theoretical basis for the 2% per annum inflation target which was chosen because it seemed right. Next comes the fact that changes are usually to ease policy and give us a higher inflation rate.

Notably, the Fed changed its language on inflation, replacing its 2 percent inflation target commitment, and instead said it will “[seek] to achieve inflation that averages 2 percent over time.”

This change is a substantial departure from the previous flexible inflation-targeting regime. ( Dallas Fed)

It continues

By adopting average inflation targeting, the Fed is communicating that 2 percent is not a ceiling for inflation and that it may let inflation exceed 2 percent modestly and temporarily to make up for past low inflation. The key aim of this policy shift is anchoring inflation expectations.

With the US CPI at 9.1% some two years later how is that going?

The Bank of Canada also changed things and the significant change here to my mind echoes the UK.

actively seek the level of maximum employment needed to sustainably achieve the inflation target. The Bank will consider a broad set of indicators to gauge the health of the labour market and to inform its assessment of the economic outlook.

You cannot target both inflation and employment as they have found out rather quickly because this happened only last December and we now find them doing this.

Bank of Canada increases policy interest rate by 100 basis points, continues quantitative tightening.

With Canadian CPI at 8.1% I guess they are finding that no-one is especially interested in its preferred core measures which are between 4.6% and 5.5%. Anyway they too are quite a bit above the inflation target.

The generic claim here used to be for an increase in the inflation target to either 3% or 4%. That is currently much quieter than usual because some at least have the sense to realise that the present burst of inflation has reminded people of how badly it affects their lives. In essence the argument is that at the lower bound for interest-rates they need policy flexibility. What they never answer is that it is the policies they support which got us where we are! Instead they sing along with Andrea True Connection.

More, more, more
How do you like it? How do you like it?
More, more, more
How do you like it? How do you like it?

There is a particular irony in this from the Bank of Canada which was only from last December, and the emphasis is mine.

use a broad set of monetary policy tools, as well as the 1 to 3 percent inflation-control range, to deal with the likelihood that the Bank’s policy rate will be at its lowest possible level more often.

It has raised interest-rates 4 times since then with the first happening less than 3 months after that statement.


I do not believe it is a coincidence that we are seeing an inflation burst after so many central banks relaxed their inflation targets. Below is another example from July last year.

New strategy adopts symmetric 2% inflation target over medium term. ( ECB)

The change was the use of the word symmetric whereas before they targeted just below 2% ( which was once defined as 1.97%). As it is now 8.9% they are of course miles off.

Rather curiously they were considering a change which I would see as an improvement.

Governing Council confirms that HICP remains appropriate price measure and recommends inclusion of owner-occupied housing over time.

The problem is that central banks so rarely look at the actual costs of owner-occupied housing. They instead prefer to fantasise that owners pay rent to themselves and in the US that represents 24% of the CPI. It is hard to believe that they have been allowed to rig the numbers like this but there are many who should know better willing to claim that it represents reality. That has had a rough year with house price growth exceeding rents by such large amounts ( around 14%). The simple fact that people buy a home to avoid paying rent gets ignored.

So that is one route and the other is to lower the inflation target as after all price stability is 0% and not the 2% claimed. The inflationistas have claimed that when inflation rises people can switch goods or more formally substitute them. For example I recall Danny Blanchflower assuring us that people could switch from butter to margarine. As the price of the latter soared he has gone rather quiet on that front. But this phase has reminded some and taught others ( as younger people have never experienced anything like this) that inflation causes real economic pain and hardship.

On the other side of the coin well there is this from Mary Daly of the San Francisco Fed.

JUST IN: Fed President Mary Daly has said: I don’t feel the pain of inflation anymore. I see prices rising but I have enough… I don’t find myself in a space where I have to make tradeoffs because I have enough, and many Americans have enough. ( @unusual_whales)

One of her ex-colleagues has just got a new job after leaving the Fed under a cloud.

PIMCO Hires Richard Clarida as Managing Director and Global Economic Advisor ( @chigrl)

32 thoughts on “What should be the inflation target?

  1. “Japan has low inflation in spite of the efforts of its central bank not because of them.”

    It might well be ‘because of them’, though.

    The BOJ seems to have finally conceded that moving pre-existing private sector balances from govt offered savings accounts to govt offered current accounts does precisely nothing to the price of goods and services in the economy, but setting a negative interest rate on govt liabilities not only stops the large transfers from the public sector to the private sector which is called “interest on public sector debt”, it actually acts as a tax on the private sector, draining purchasing power from it and thus tempering demand.

    Maybe they’ve discovered that cutting govt spending and increasing taxes on the private sector can subdue demand and keep prices in check. As did the SNB.

    Just a thought…..

    • draining purchasing power

      20% inflation certainly drains the purchasing power of your pound, I’d say its vapourizing it at the mo

      As the consumer becomes recalsitrant on spending ,even extinct , now amount of IR reductions will revive them,

      Perhaps this is the new plan for Net Zero ?

      you will owe us and we’ll be happy ?

      Dark skies heading this way , me thinks


      • Cash has been vapourized since interest rates fell to 0.5% years with inflation during that time and now even more since.
        I suspect the true loss of value of money in the bank must be nearer 30% in the last 10 years or even more.

        The only consolation is with interest rates rising it will slow down or even push down property prices.

        What could also happen is we see deflation which some are forecasting next year, and if that happens cash is King.

    • Shaun:

      “She told the event: “The best way of dealing with inflation is monetary policy and what I have said is I want to change the Bank of England’s mandate to make sure in the future it matches some of the most effective central banks in the world at controlling inflation.”

      “The latter part of that statement creates a little head-scratching as that presently is a very short list. Especially if we recall her past statements on this issue.”

      “So the Bank of England should set a negative interest-rate, buy a lot more government bonds as well as lots of equities? That part of the plan has clearly not been thought through. Japan has low inflation in spite of the efforts of its central bank not because of them.”


      Good job I had eaten my breakfast otherwise I would have choked on my cornflakes when I read the bit about Japan LOL. These idiots want to run our country I have no real faith in Rishis Dishis neither Liz Trustless at he moment she has already had to backtrack on moving civil servant jobs up North which may have leveled down with wage cuts !

      She has previoulsy said we should have raised rates higher previoulsy but the horse has bolted now and raising rates at the moment wont reduce inflation for a while so I have read.


      We now face one of the worst recessions we have ever had some are saying now that we will see deflation soon.

  2. Liz Truss coming out with a commitment to change the Bank of England is merely an attempt to gain support for her leadership challenge. In general elections politicians lie and offer the voting public things that they want and promise to reform things they don’t,especially things that are at the top of the voters talking points and concerns, when they get elected these policies are soon forgotten(aided by the compliant media who fail to challenge them on the broken promises), and so we now have a prospective Tory leader appealing to concerned MP’s who have inflation at the top of their constituents complaints list and are worried about losing their seats.

    Does anyone seriously think a new broom in number 10 is going to tell the Bank of England what to do – really?
    As I said before, whether todays increase is 0.25 or 0.5% doesn’t make the slightest difference, (personally I think they will go for 0.25%)as the damage has already been done and this inflation is merely a sympton of it, you can be sure the BofE will have one eye on the housing market and the construction sector, the minute either start to wobble they will stop raising rates and communicate this to the market with a suggestion that the next move might be down, with re-assurances that it is all for the benefit of the hard pressed consumer and small business of course.

    • “Does anyone seriously think a new broom in number 10 is going to tell the Bank of England what to do – really?”

      You mean mop actually but no is my answer not when the BOE should be independant, but in truth the BOE isn’t truly independant under the banking act the GOV can indeed inervene so I have read.

  3. Hello Shaun,

    re : “I see prices rising but I have enough”

    well doesnt that take the biscuit , I doubt any of the wonks at the CB understand the misery the proles have and it seems they don’t care either – I’m alright Jack !

    Too busy checking their RPI linked pensions whilst scoffing gold plated steak and guzzling Châteauneuf-du-Pape in their Ivory towers …..

    where’s me pitchfork !


  4. Shaun,
    Whatever the official inflation rate the Telecos add 3.5% for their services when it is obvious broadband is becoming an essential service but still has VAT at 20%!

    • Hi Chris

      That is an interesting point and yes you are right as frankly these days it is more important than a landline. I wonder if younger people even know what they are?As to the VAT my bill hides it as I pay £26 a month for broadband and TV but it just says including VAT.

  5. As if to prove my point, they raised 0.5% and sterling STILL FELLL!, DOWN NEARLY 1% AGAINST THE DOLLAR ALREADY!
    BOFE is predicting inflation to rise to 13%, so given my rough and ready calculation on any government statistic they try to minimise and supress,being around 50% of what it really is, that means inflation is now running or will shortly be running at mid twenty percent p.a.

    • BoE expects inflation to reach 13% when on the street its already 20%

      I really must get one of these jobs ! PAH!


    • KEVIN this is the problem when the BOE raises rates there is no guarantee sterling will rise and some clown on GB news was saying this is why the BOE needs to raise rates to strenghten sterling. But it isn’t just rates which affect sterlimg it is the outlook for the economy and money markets. At the end of the day it is what the market thinks of all of the data which affects currencies. So my view is the markets have focused on gloomy data ahead for the UK economy and the worst rrecession for decades.

      If the BOE is right and we do entrer a recession later this year the BOE may be forced to cut rates to avoid a long recession and maybe a depression.

      It is a sad and sorry mess tin hats time.

      • BBC

        “Bank’s action could make recession risk worse – economist
        An economist has warned the decision to increase rates will not help with the cost of living crisis and could even “exacerbate the risk of recession”.

        Miatta Fahnbulleh, chief executive of the New Economics Foundation, tells BBC News that “people who have already been squeezed will be hit” by the Bank of England’s decision.

        She also notes that millions of people are already “having to borrow to get by” as inflation drives prices higher.”


  6. BofE also predicting the economy to enter a recession and they expect it to last the entire 2023, and they are now starting to sell their holdings of gilts acquired during QE, this is where every disastrous prediction outlined on this blog over the past few years starts to come true.

    The “economy” ( presumably they are referring to is the only thing left )a.k.a the housing market, so they are expecting a big fall in house prices, so don’t expect any more big increases in interest rates – the fx market read that right, also gilt sales- who the hell is going to buy UK gilts with a leaderless goverment that has an imploding house bubble of an economy with a central bank that will never raise rates to protect the currency?Put yourself in the position of an overseas investor, would you buy gilts with raging out of control inflation AND a collapsing currency? NO!!! If this is how it transpires, it won’t be long before they have to re-start QE as gilt yields will keep rising and force up interest rates to the point where they threaten the housing bubble – we can’t have that can we? – with entirely predcitable effect on sterling as a result. Re-starting QE will be the final gunshot to the head of our currency.

    So assuming these gilt sales lead to massive losses(in the £billions)as the yields will keep going higher and higher, how are the losses on these gilt purchases going to be accounted for or who pays?I’m sure we all know the answe to that one.

    • Hi Kevin

      Conventional theory would say that UK Gilt yields would rise in response to some active QT ( about £40 billion over the
      next year). But they ended the day pretty much where they started which shows the extraordinary times we are living in. A Bank Rate increase of 0.5% and more QT was simply shrugged off.

      As to Bank of England forecasts you may enjoy this.

  7. Hello Shaun,

    my favorate cheese has helped lower inflation today. Previous week it was £ 9.70 per kg ( premium brand ) and today its a deflationary £8.00 per kg , hurrah ! a drop 17.5% ! the BoE will need to raise rates more so to stop this ….

    However just over 12 months ago I was paying £6.30 per kg . but as that drops out of the yearly record so it dont count , except it does to us proles who have to pay our own bills .

    the higher lows principle in action


    • Hi Forbin

      I have very little cheese expertise ( cheddar only) but mine has continued to get more expensive. Your point though is one I raised with Danny Blanchflower. He refuses to admit that 2% inflation is of much less use if you have had 10% he year before.

      I haven’t heard from him on inflation for a while which is revealing…

  8. Anyone know where I can listen to the BOE questions today which was broadcast on SKY news and I only listened to part of it. Sometimes it’s on YouTube maybe Shaun knows?

    Not that is matters that much but if I get bored some time I may listen to the complete press conference.

  9. Peter,
    Try this, its a Guardian look at reaction to the Bank’s rate rise and their protests at even the suggestion that their right to destroy the country might be taken away – sorry their “independence”.


    Check out the graph showing interest rates, and how fast they were cut in 08/09 straight down from nearly 6% to 0.25% and then the recent snails pace of rises in response to over 20% inflation – SIX INCREASES TO GET TO JUST 1.75%.

  10. Great blog as usual, Shaun, and thank you for your critique of the Bank of Canada.
    The passage you quote from regarding the maximum level of employment is from the Bank of Canada’s background document, “Money Policy Framework Renewal 2021.” The joint statement of the Government of Canada and the Bank of Canada also mentions the maximum level of employment: “Given that there is uncertainty about the maximum level of employment that is consistent with price stability, the Bank will CONTINUE TO use the flexibility of the 1 to 3 percent control range to actively seek the maximum sustainable level of employment when conditions warrant.” (Emphasis added.) The background document is the work of the Bank of Canada but the joint statement is drafted by the Finance Department and the Bank of Canada together. Anyone reading this joint statement who had not read any of the previous agreements would believe that this marked a continuation of a policy of treating maximum employment as a goal that had been around at least since the previous agreement in 2016. In fact, it had never been mentioned as a goal in any agreement negotiated between the Minister of Finance and the Governor. As you said, you cannot target both inflation and employment. Finance Minister Freeland claimed that this had always been a goal of the Bank of Canada, and now it was just being put in writing. Even if this were true, it was surely a terrible time to write what had previously been left unwritten, when the CPI inflation rate had just risen from 4.4% in September to 4.7% in October, and everyone was worried about how much higher it might rise. Three days before the renewal agreement was announced, monetary economist David Laidler wrote: “Above all, it [the Bank of Canada] needs to begin rebuilding its credibility. To this end, its current inflation control mandate must be renewed with firm political backing, and WITHOUT THE ADDITION OF FURTHER BELLS AND WHISTLES.” It’s a shame that Professor Laidler wasn’t more persuasive. When Conservative Party leadership candidate Pierre Poilievre said he would replace Tiff Macklem “with a new governor who would reinstate our low-inflation mandate” there was endless pearl-clutching about the threat to the Governor of the Bank of Canada and virtually no curiosity about what Pierre would change in the 2021 renewal agreement. Unfortunately, Pierre has not been very voluble on this topic himself. However, one thing that he would be sure to discard with the 2026 renewal agreement if he were Prime Minister, and in a position to do so, would be the maximum employment goal.

    • Hi Andrew and thank you

      I was always taught you have to have at least as many instruments as targets. As they have one ( I see QE/QT as a subset of the interest-rate instrument aimed at longer-term interest-rates) then they can only have one target. So you can target inflation or employment not both.

      If we now switch to pandemic events they acted in a rush ( at times panic) to cuts rates to support employment but when inflation was the issue central banks have dithered and now are well behind the times. So employment is the main target.

      Thanks for the David Laidler mention as he wrote one of the economics text books I studied back in the day. Good to hear he is still alive and kicking as Simple Minds would say,

      • Thank you for your reply, Shaun. I knew that Professor Laidler was from England, but am pleasantly surprised to hear that you studied from a textbook that he wrote. He has taught at the University of Western Ontario in London, Ontario since 1975 and is still professor emeritus there. Here is the link to the full intelligence memo that I quoted from:
        I have noticed how British economists like yourself still seem to pay much more attention to the monetary aggregates than most Canadian economists, and so it is maybe not surprising that one of our leading exponents of the quantity theory of money is British-born. He is not alone though; there are other, Canadian-born economists who make sure that the money supply isn’t forgotten, including the University of Victoria’s Kenneth Stewart. The Bank of Canada hasn’t targeted the money supply (it was M1 then) since 1982, and I don’t know of anyone who advocates targeting a particular monetary aggregate again. Just the same, the monetary aggregates should be monitored to make sure that their growth rates aren’t dangerously out of line with the inflation target.

  11. If you’ve sucked up all the hoi-polloi’s cash with a decade’s zirp paying no interest on their savings, then eat their capital & confiscate their housing with a bout of good old high inflation on necessities, AND THAT IS WHERE INFLATION IS CENTRED & DELIBERATELY SO, then sooner or later, the unwashed are back where we belong; £50 in the bank, & grubbing a hand-to-mouth existence & forelock tugging to our betters, IF we’re lucky.
    Once that’s achieved, we have no further purpose for inflation, in fact disinflation mean that the public sector debt to the private grows, & taxing the rabble to pay them grows & keeps us in our place
    About 2.5 years ago, (not long before lockdowns) I did say that I wouldn’t be at all surprised if, at some point we saw very high rates of inflation, very quickly followed by a crunch of deflation for the very purpose outlined above.
    Remember also, that the rich do not keep their money in banks, so, if in the end game, the banks are disposable, some cash in hand might be useful.

    I feel that, at present, there is far too much resistance to introducing a global digital currency, & this may be another route to stripping ordinary people of what little wealth they have.

    • HI therrawbuzzin

      Your comment reminded me that his has been going on for quite some time now. Here is Bank of England Deputy Governor Charlie Bean from the 28h of September 2010.

      “It’s very much swings and roundabouts. At the current juncture, savers might be suffering as a result of bank rate being at low levels, but there will be times in the future — as there have been times in the past — when they will be doing very well.

      “Savers shouldn’t see themselves as being uniquely hit by this. A lot of people are suffering during this downturn … Savers shouldn’t necessarily expect to be able to live just off their income in times when interest rates are low. It may make sense for them to eat into their capital a bit.”

      It still has not happened…

      • Time for Elvis. It’s still a trap. At least we’ve moved from “emergency” rates to “panic” (that’s anything below 2% or more than 12%) And we can blame the kiwis for the magic 2% inflation target. Not too good in NZ now, it’s 7.3% and rising.

  12. Hi Shaun

    Liz Truss is a say anything populist she believes in nothing she is an idiot Johnson just pretended he was an idiot.
    Turning Japanese is a terrible idea but nothing that emerges from her empty head is likely to be sensible.
    My opinion is this inflation is not an accident they have allowed so much global debt to be built up its left-them a choice inflation or massive defaults.
    So the choice was a no brainer fleece the sheeple destroy their savings and pensions to reduce the debt load.
    The whole lockdown was very strange it was not Ebola but the lockdown created supply chain problems add in the exponential monetary expansion and what do you know….voila inflation.
    The FIAT money system is a debt based system which is inherently inflationary.
    During the industrial revolution the money you earned for you labour maintained its purchasing power over a100 year period,so under such a system saving was worthwhile.
    Inflation is a tax on ordinary people.

    • Hi Private Fraser

      What politician actually believes in things these days? The only thing some maybe do is all that net-zero stuff that is going to have people dying of cold this winter. It is quite a mess…

    • Thank you, therawbuzzin. I had heard about that Amnesty International report but didn’t have a link to it. To take the conversation back to economics, sort of, if you watched Zelensky’s TV series, “Servant of the People” it ends with President Goloborodko making an impassioned speech to the Ukrainian people about the mountain of debt that the country is burdened with and the special effort they will have to make to pay it down. His speech is so good, the people rally round him and the debt is paid off in a single day. It has to be the very silliest ending of any TV series in the history of the world. Russia invading Ukraine is like Germany invading Austria, if you look at it in terms of their relative GDPs on a PPP basis. It is such a one-sided contest it is hard to see how Ukraine can hold what it had before February 24, let alone recover the territories it lost, certainly within Zellensky’s mandate. But his speeches still suggest otherwise. It appears that he confuses being the actual Ukrainian president with his fictional role as President Goloborodko and believes that pretty speeches will allow him to accomplish what is improbable or impossible.

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