Ben Southwood, ASI Head of Policy, commenting on the fall in annual CPI inflation to 1.6%, said:

"After years of above-target annual consumer price index (CPI) rises, then coupled with lacklustre growth or even retrenchment, below-target inflation at the same time as substantive recovery is highly encouraging.

"Disinflation is a worry in a time of weakness, but should be desired and expected in a time of strength—many economists believe the failure to account for the "good deflation" generated by productivity improvements from inward migration and developing world growth in the early 2000s set the scene for the 2007-8 crash.[1]

"Since this fall is accompanied by robust real GDP recovery, and appears to be mainly driven by cheaper fuels, we needn't be too worried that the Bank of England has decided to go the way of the European Central Bank and let nominal aggregates fall well below the appropriate and previously expected growth rates.

"But the difficulty of working out whether or not this inflation is in fact supply- or demand-side, and thus whether or not the Bank should respond by easing or doing nothing, is yet another indication that we should look to an alternative policy regime. Targeting nominal income would automatically let inflation fall when RGDP growth is strong and automatically let inflation rise when RGDP growth is weak—both the ideal appropriate policies.[2]

"The Treasury and the Bank should seriously consider this alternative—to take uncertainty out of the system and avoid a repeat of 2008."

[1] http://object.cato.org/sites/cato.org/files/serials/files/cato-journal/2008/11/cj28n3-1.pdf

[2] http://mercatus.org/sites/default/files/Sumner_NGDPTargeting_v2.pdf

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The Adam Smith Institute is an independent libertarian think tank based in London. It advocates liberal public policies to create a richer, freer world.