Prospect MagazineProspect Magazine

Central banks and the inflation-targeting disaster

By Paul Wallace

21 Apr 2023 · 6 min read

Editor's Note

Central bank policies contributed to the intensity of the inflation upsurge, argues Paul Wallace in Prospect Magazine. The root of the problem, he says, may be the inflation-targeting regime itself.

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?

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