Tony Yates provides an enormous public service with his post:” 0.5% annual CPI inflation. Good news?”. It really shows how misguided (and confusing) IT really is:
That’s what George Osborne’s twitter feed would have you believe. And it was echoed by Andrew Sentance. Statements like these are at odds with modern monetary macro, and they are pretty irresponsible.
Why irresponsible? Well, the Chancellor told the Bank of England’s MPC to hit a 2% target. How could it be good news that the Bank undershot it by 1.5 percentage points? Are we to believe that the Chancellor, if he had time to get far enough down into his in-box, would lower the target, to try to ensure more ‘good news’?
Why inconsistent with modern monetary macroeconomics? The suggestion is that if we had prices falling 20% that would be even better. 50%, better still. No. The inflation target was set at 2% for a good reason. The view that monetary policy can’t improve living standards by generating falling prices, or, if we return to the old 70s fallacy, neither can we buy lower unemployment with higher inflation. The best monetary policy can do is to keep inflation stable and low, additionally weighing inflation stability with real activity stability in the short run. It’s possible that some future generation of macro theory will overturn this wisdom. But right now, this is what we understand, and this is what informs the remit HMT gave to the MPC, as you will see from the March 2013 remit review.
Tony thinks it´s “silly”, but if he really thought hard about it he would come to the conclusion that doing NGDP Level Targeting is the way out of this morass!