Inflation Targeting: The British Experience

This lecture describes the United Kingdom's experience with inflation targeting. It provides a historical perspective to the introduction of inflation targeting, discusses the concept of inflation targets, and compares an inflation targeting regime with money supply and exchange rate targeting regimes. It is noteworthy that inflation targeting is based on the assumption that low inflation is the proper objective of monetary policy. A significant portion of the lecture covers the issue of the measurement of inflation. It discusses whether asset prices should be taken into account in the inflation measure and looks in particular at the experience of Japan in the late 1980s. It also considers sources of imperfection in traditional measures. It concludes that monetary policy will have to be conducted by reference to estimated price indexes that fall short of the conceptual ideal but does not regard this as seriously undermining an inflation targeting regime. The lecture goes on to discuss the issues of (1) having a target band for inflation or not, (2) the difficulty in forecasting inflation, and (3) the time horizon over which monetary policy should aim. The lecture highlights the important role that openness and transparency play in achieving credibility in monetary policy. It highlights the five devices that are now in use in the United Kingdom, and notes some of the benefits emerging from the open and transparent nature of the United Kingdom approach. It concludes by warning that inflation targeting does not promise to make monetary policy easy but does have the positive virtue of directing attention to many technical issues that need to be resolved in conducting monetary policy.