The Guardian view on inflation: way off target

http://www.theguardian.com/commentisfree/2015/feb/22/guardian-view-inflation-way-off-target

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As polling day nears, we can look forward to a dismal burst of politics as archery. Ministers will brag about bullseyes hit (2m apprenticeships), the opposition will seize on arrows that have veered off course (immigration, the deficit) and wise commentators will explain how the obsession with targets produces all sorts of perversities.

Last week, however, when things went wildly off course in relation to the most important target of the lot, we got a topsy-turvy reaction. Instead of popping up with sheepish excuses, the government’s top brass bugled news of their big miss to anyone who would listen. The target is for an inflation rate of 2.0%, with a percentage point miss in either direction being taken so seriously that the governor of the Bank of England has to pick up his pen and explain to the chancellor what’s going on. An undershoot is, very explicitly, formally regarded as “just as bad as inflation above the target”, and so when the January number came in at 0.3% then that represents – surely – a serious misstep.

Inflation matters, not only as an imperfect gauge of the industrial mood but also in its own right

This target matters a great deal because, since the pound crashed out of the exchange rate mechanism (ERM) a generation ago, governments of both stripes have sought to steer the economy as a whole almost exclusively via control of the course of inflation. Some say the economy could be kept on a more even keel if interest rates were settled using some other gauge, such as money GDP, and that is probably right. But that can hardly be the government’s case while it clings to the inflation target. Besides, inflation matters, not only as an imperfect gauge of the industrial mood but also in its own right. When it sinks too low, capitalism becomes sclerotic – real wages rigidify, debts weigh more heavily and demand can take a knock, as consumers are relieved of the pressure to beat price rises tomorrow by parting with their money today.

George Osborne puts his personal weight behind the target, by reaffirming it in every budget. He has shown himself especially alert to the danger of dragging the economy down by obsessing about an overshoot, refining the mandate to empower Threadneedle Street “to use unconventional monetary instruments to support the economy”. How odd it was, then, to have the same chancellor welcome last week’s slide in inflation to so far below where he thinks it should be as “a milestone for the British economy”.

At one level, of course, Mr Osborne – whose sudden enthusiasm for disappearing inflation was loyally echoed by his Lib Dem deputy, Danny Alexander, as well as by Nick Clegg – is simply trying to say popular things before an election. Inflation is down because petrol has got cheaper, and most voters will be cheerful about that, so there is no political merit in souring the good news. And indeed, it could even be that the economic effects of ultra-low inflation will prove benign, if it is indeed cheap oil that is the sole cause.

If that is the analysis, though, then it really is time to retire the target, and move to another that is in line with the real objectives. For when chancellors cheer at their own targets being missed, then, instead of strategic economic direction, we are left with aiming in the dark.