Central banks took greater, though not total, mastery over their monetary destinies. With increased global integration of capital, goods, and labour markets, inflation stabilisation has faced powerful countervailing forces. Perhaps as a result, advanced economy inflation rates have moved more closely together under Inflation Targeting than under Bretton Woods. The correlations between inflation rates in major economies grew in the wake of the crisis (Chart 5 (d) – see annex). As they have written their monetary scripts, central banks have at the very least had an editor. If they are not careful, they could become ghost writers. 7  First identified by Irving Fisher (1933), “The debt-deflation theory of great depressions”, Econometrica. 8  See IMF (2013), World Economic Outlook, Chapter 3, April. 9  In the UK, “the framework for monetary policy was, at best, opaque”, according to King (1997), “The Inflation Target five years on”. 4  BIS central bankers’ speeches  3. Why is inflation low globally? Of course, an important global factor behind current low headline inflation has been the sharp fall in the price of oil, which has been driven primarily by large increases in its actual and potential supply. This means that while it’s been a short-term drag on inflation, it’s good news for growth. The Bank estimates that lower oil prices will boost the level of UK-weighted global GDP by a little under 1 percentage point over the next three years, with a consequent boost in demand for UK exports of around 2 ½ %.
On “lowflation” and deflation  Why do we target the low, but positive, inflation rate of 2% rather than a zero or even negative rate? The simple answer is because it’s our job, given to us by the democratically elected representatives of the British people. We are accountable to Parliament for meeting it. On the occasions when inflation moves by more than 1 percentage point away from the target, we are required to explain publicly why that’s happened and what we’re doing about it in an open letter to the Chancellor. Before this year, that had happened 14 times in the past when inflation has been too high. The particularly subdued January inflation rate meant I had to write the 15th open letter, the first to address these points with respect to very low inflation. It is likely that I will have to write a few more of these over the course of the year. Our remit for 2% inflation reflects the lessons of the past, including the fight against high inflation in the 1970s and 1980s, as well as the deflationary disasters that have followed past financial crises. Low, stable and predictable inflation helps to stabilise households’ and firms’ expectations about future price increases. That helps them plan their spending, investment and hiring decisions. In short, the Bank of England worries about inflation so that everyone else doesn’t have to. High inflation damages growth, in part, because high inflation also tends to be volatile, generating uncertainty that makes important economic decisions more difficult.