As a result, inflation expectations represent an important link in the monetary transmission mechanism – especially through the term structure of interest rates – and greatly influence the central bank’s ability to achieve price stability. It is crucial for a central bank to monitor inflation expectations, making sure that they remain well anchored and consistent with policy objectives. Since the economy is constantly buffeted by unanticipated shocks, short-term inflation expectations should reflect the effects of these shocks. For example, if energy prices increase suddenly due to a supply disruption, short-term inflation expectations should move up. This is completely consistent with medium-term price stability, if at the same time, forward inflation expectations – that is, expectations of inflation for after the supply disruption ends – do not move. This stability of longer-term inflation expectations in the face of movements in short-term inflation expectations is the hallmark of sound, effective and credible monetary policy. In standard macroeconomic models it is trivial to measure inflation expectations: under the rational expectations assumption, any economic agent in the model could produce the unique inflation expectation for any horizon. In the real world, central banks must rely on various indirect approaches to measure inflation expectations: market-based measures, surveys of professionals such as economists and market participants, and surveys of households. All three types of measures have advantages and drawbacks. It is therefore important for a central bank to use a variety of measures that complement one another.
That is why, for example, we have clarified expectations about how firms should manage risks from cryptoassets and why, with the FCA, we set up and chaired the Artificial Intelligence Public-Private Forum to help us better understand the impact of artificial intelligence and machine learning on financial services. [3] It is also why we published this July, with the FCA and Bank as Financial Markets Infrastructure regulator, a discussion paper on critical third parties proposing proportionate measures to strengthen their resilience in a manner that supports the openness of the UK as a financial centre. [4] Good prudential regulation also changes to meet new sorts of risk, which is why we were amongst the first regulators globally to develop standards for operational resilience. [5] It turns out that white blood cells that target immune responses at threats, and direct them away from our own bodies, are called ‘regulatory T cells’, although I doubt they were named after prudential regulators! But they do what we need to do when we choose to take action. We need to boost the health of the markets we oversee, by letting our ‘regulatory T-cells’ target the threats we face in a tailored manner, leaving the healthy parts undisturbed. This is why, for example, we are  Page 4  building what we call a Strong and Simple framework for small domestic banks and building societies for whom Basel standards were not designed.