The case for price stability - The London School of Economics lecture

Quarterly Bulletin 1992 Q4
Published on 01 December 1992

In the inaugural LSE Bank of England lecture the Governor discusses the case for price stability. Noting that persistent inflation is very much a post-war phenomenon, he argues that the United Kingdom should not be regarded as an inflation-prone economy. Rather, the inflationary experience of the post-war period resulted from attempts by governments to exploit an apparent trade-off between inflation and unemployment which does not, in fact, exist in anything beyond the short term. The Governor lists many of the costs of inflation-not only the well-known costs associated with perfectly anticipated inflation, but also the distortionary and redistributive effects of unanticipated inflation. Such costs, he argues, arise at any rate of inflation-so it is crucial to settle for nothing less than price stability, which he defines as an annual rate of increase in the published measure of inflation of 2% or less. This is also the lesson from history: some of the most eminent economists of the century stressed the importance of price stability as a way of reducing the amplitude of business cycles. Price stability will only be achieved if the policies aimed at this objective are credible. The ERM was a mechanism which helped build and maintain that credibility, but in the conditions that developed this year it had the effect of leading to an excessively rapid, and potentially damaging, disinflation. The departure from the ERM required a new framework, and one was outlined in the Governor's and Chancellor's Mansion House speeches. A key aspect of this is the Bank's commitment to the publication of a quarterly Inflation Report. This document, will be published in each Bulletin from next February. It will be a wholly objective and comprehensive analysis of inflationary trends and pressures and will set out the analysis in the context of the Bank's overriding commitment to price stability and its view that policy should be directed to that end.

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