COLUMNISTS During the past decade and a half there has been an over-riding economic objective in many countries – with the notable exception of the US – in the shape of consumer inflation targets, usually of about 2 per cent. I must confess to being sceptical about the sufficiency of such targets from the outset.
My underlying reservation was that during the longest period of stable prices in history under the pre-1914 gold standard there were considerable year-to-year variations in inflation – in the UK ranging from negative numbers to 5 or 6 per cent. Stability over a lifetime was the best long-term bet; in the meanwhile, short-term variations could act as a safety valve. But there were plenty of other cautionary arguments, above all the extreme dependence of most inflation-targeting regimes on highly fallible estimates of the “output gap” – that is, how far an economy was from capacity levels.
