Andrew G Haldane: Inflation - a tiger by the tail?

Pre-recorded speech by Mr Andrew G Haldane, Executive Director and Chief Economist of the Bank of England, given online, 26 February 2021.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Most countries around the world now have targets for inflation, often pursued by operationally-independent central banks. Inflation-targeting requires central banks to assess the future path of inflation, and the risks around it, often through published inflation forecasts. Monetary policy is then set to meet the inflation target in expectation, subject to these risks. This is the operational essence of flexible inflation-targeting.

The Covid crisis has resulted in an unusually high degree of uncertainty about the future path of inflation. This is clear from the confidence intervals around the MPC's two-year-ahead inflation projections, which are currently twice as large as normal. In its latest forecasts in February, the MPC judged there to be a one-in-three chance of inflation lying below zero, or above 4%, at the two-year policy horizon (Chart 1).

This high degree of two-sided uncertainty is understandable. Economies have taken a huge hit as a result of the Covid crisis, contracting by almost 8% in the UK and 4% globally during 2020. This has widened output gaps and depressed inflation. In response, policymakers have provided unprecedented degrees of policy support – in a number of advanced economies, double-digit percentages of GDP in both Quantitative Easing (QE) and fiscal stimulus. These actions should stimulate activity, shrink output gaps and boost inflation.