Topic updates
Is the UK's inflation target fit for purpose?
1st February 2024
Here is an excellent article in the Guardian with a Canadian academic, Louis-Philippe Rochon highlighting the arbitrary nature of the 2% inflation target. Remarkably, nearly 60 countries have adopted this as their inflation target, without there being a definitive position on why this is the case.
Of course, no-one denies that a lower target might risk deflation, and that's most probably a bad thing, but why 2%, and not 3 or 4%? This is particularly interesting in the present environment because the 2% target appears to have become a de facto default target, and the failure to hit the 'target' necessarily shapes monetary policy debates.
Equally, given the trade-off between inflation and unemployment, is there a risk that the pursuit of the 2% target imposes higher than necessary costs in terms of unemployment too.
The Bank of England has voted 6-3 to keep UK policy interest rates at a 16-year high of 5.25%. But rates may well start heading lower in the early summer if inflation falls back to target and settles there.
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