But what is different is that the current risks to inflation are unusually large. My central view is that these risks should gradually lessen as the temporary effects pushing up on inflation wane and the economic recovery continues. But it is possible that some of the risks will crystallise and policy will need to react. It is quite likely that in hindsight, once we see how the economy evolved and which risks materialised, that the current stance of policy will be criticised for having been too tight or too  BIS Review 122/2010  7  loose. But we cannot set policy with hindsight. All we can do is set policy in such a way that balances the opposing risks to inflation and be ready to change policy decisively in either direction as this balance of risks alters. I do not know when policy will next change or in what direction. But I can assure you that when making this decision, the objectives of policy will be clear and unchanging: inflation, inflation, inflation. References Benito, A, Neiss, K, Price, S and Rachel, Ł (2010), “The impact of the financial crisis on supply”, Bank of England Quarterly Bulletin, Vol. 50, No. 2, pages 104–114. Bils, M (1989), “Pricing in a customer market”, The Quarterly Journal of Economics, Vol. 104 (4), pages 699–718. Campa, J and Goldberg, L (2006), “Distribution margins, imported inputs, and the sensitivity of the CPI to exchange rates”, NBER Working Paper No. 12121. Chamberlin, E (1933), “The theory of monopolistic competition”, Cambridge, Mass.
And our future prosperity will depend on our maintaining an environment of low and stable inflation. One of the most worrying comments I have heard in recent months came at a lunch of senior businessmen I attended. One of the diners suggested that the UK was returning to its old ways “of depreciating the exchange rate and inflating its way out of trouble.” Soon after, a City circular asked “is the MPC turning a blind eye to inflation?” This is dangerous talk. The evils of inflation are well known. The high and volatile rates of inflation of the 1970s and 80s stunted our economic performance. Companies and households were unable to budget and plan efficiently. Resources were misallocated. Longterm contracts were avoided. The value of hard-earned savings was eroded. This dangerous talk has perhaps been partly fuelled by the behaviour of inflation in recent years. CPI inflation has averaged close to 3% over the past four years, significantly higher than the 2% target and for the most part higher than the MPC anticipated. CPI inflation has been above target for 41 out of the past 50 months. Lest we forget, this is a long, long way from the high and volatile inflation of the 1970s and 80s. Even so, it is perhaps understandable that some may have started to question the commitment or competence of the Monetary Policy Committee. Has the MPC gone soft on inflation? Is this a conspiracy with the Government to deflate away some of its debt?