The flare-up in prices over the past two years has caused a crisis of confidence in the central banks of America, Britain and Europe which are supposed to control inflation. The Bank of England (BoE) is mandated by government to keep inflation steady at 2 per cent, but today is struggling to haul it down from the double-digit rates that have savaged living standards. The story is similar for many other central banks which have staked their credibility on hitting their inflation targets—then missed them.
Consumers’ everyday experience when shopping and paying bills is now far removed from the price stability that these targets were supposed to deliver. So were central bankers just unlucky, or did they get things wrong? More fundamentally, and despite being a central component of economic and monetary regimes around the world, is the whole idea of inflation-targeting flawed?