Because of the infamous “long and variable” lags between changes in interest rates and their impact on inflation, the MPC does not yet have much of a track record in terms of inflation outturns. But since the target given to the MPC is for inflation, let me start there. Between June 1997 and March 1999 (the latest month for which inflation has been published) RPIX inflation averaged 2.7%. During that period, inflation ranged from a low of 2.4% to a high of 3.2%. Over the past nine months it has remained within 0.2 percentage points of the target, a remarkable degree of stability. It is most unlikely that inflation can remain, month-by-month, as close to the target as that. Unexpected movements in the exchange rate, oil or other commodity prices, indirect tax rates or a multitude of other influences could all lead to divergences of inflation from target. Because of the lags I mentioned earlier, it would take the MPC some time to bring inflation back to the target level. What matters, however, is not relatively small month-to-month movements in the inflation rate, but the expectation that inflation will average 22% over a number of years. As part of the arrangements for accountability, the Governor, on behalf of the MPC, is required to write an open letter to the Chancellor whenever inflation deviates by more than a percentage point from the target.
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