Inflation target provides clear benchmark, says Bank of England chief economist

The Bank of England’s 2% inflation target provides a “benchmark” against which monetary policymakers can be held accountable, according to the institution’s chief economist.

Speaking at the University of Birmingham, Huw Pill, chief economist at the Bank of England, said economist Alan Greenspan “famously defined price stability as a rate of inflation that was low and stable enough not to influence firms and households’ economic decisions”.

He said: “The UK’s monetary policy framework takes this further, by defining an explicit 2% inflation target for a specific price index (the Consumer Prices Index), which holds at all times and penalises upside or downside deviations in a symmetric way.

“This quantitative target is clearer and simpler than Greenspan’s definition, provides a benchmark against which monetary policymakers can be held accountable and has helped to anchor longer-term inflation expectations.”

Mr Pill added: “A simple, clear, stable and unambiguous mandate for monetary policy expressed via an inflation target has shown its value.

“By contrast with what was seen in the 1970s and 1980s, the substantial external inflationary shocks to the UK economy in recent years have not triggered a de-anchoring of inflation expectations and a non-stationary upward drift in inflation outcomes.

“Rather, there has been clear reversion towards the 2% inflation target – admittedly not complete as yet, but nonetheless the clear direction of travel identified by the MPC (Bank of England Monetary Policy Committee) reflecting the restrictive policy monetary policy stance it has implemented of late.”

CPI inflation remained at 3.8% in August, the highest level since the start of 2024 and above the Bank’s 2% target rate.

Food and drink inflation rose to 5.1%, the fifth month in a row that price rises had accelerated.

In September, the Bank of England held interest rates at 4% as it said the UK was “not out of the woods” on inflation, with taxes contributing to rising food costs.