For further comments or to arrange an interview, contact Head of Communications Kate Andrews: firstname.lastname@example.org | 07584 778207
Commenting on today’s inflation figures, Head of Research at the Adam Smith Institute Ben Southwood said:
Most of the fall in CPI inflation is coming from ‘supply-side’ shocks like cheaper oil and food—this is good and makes everyone better off.
When inflation falls below target due to these supply-side improvements, the Bank of England should ‘look through’ the drop, like they looked through the continually above-target inflation of 2009-14.
The real problem is that the Bank’s target requires it to constantly make judgement calls about whether inflation shocks are demand- or supply-side. What’s more, since it ‘lets bygones be bygones’ and ignores past overshooting or undershooting of its target, this really matters.
The Bank should consider changing its macroeconomic target.
If it targeted nominal GDP (i.e. total spending) instead of inflation, it would automatically ignore dips in inflation from supply shocks and automatically fight dips in inflation from demand shocks.
If it targeted the level of nominal GDP (or just the price level) it would automatically make up for past overshooting or undershooting, so firms, consumers and financial markets can be absolutely sure about where prices or nominal GDP will be at a given point in the future.
The Adam Smith Institute is an independent free market think tank based in London. It advocates classically liberal public policies to create a richer, freer world.