Historical overview One of the more dramatic developments in the final decades of the last century was the sharp fall in inflation worldwide. This remarkable phenomenon brought inflation almost everywhere to levels not seen for the best part of fifty years. Set against the long sweep of history, it is the 1970s and 1980s that now stand out - as a major, but time limited, episode of high global inflation.2 In the UK, the period since 1992 has seen a shift to low and stable inflation combined with sustained economic growth, and steadily falling unemployment. Slightly miraculous as these developments may still seem to the generation that came of age during the Great Inflation of the 1970s - remember ‘stagflation’? - the happy fact is that for anyone in their mid-thirties, low inflation, steady growth and low interest rates are the norm. Success has many parents, and the trend to low inflation is no exception. But there is a broad consensus that better monetary policies run by more independent and more open central banks can claim a significant share of the credit. The Short History of Twentieth Century Monetary Policy goes roughly as follows. For the first time since the collapse of Bretton Woods - arguably since the Gold Standard - after decades of unhappy experiments with fine tuning, incomes policies and monetary targets, buffeted by the explosive growth of financial markets and often misled by economic dogma, governments have finally found an approach to monetary policy that seems to work.
As it happens the projections in the February Inflation Report do project a pick up in supply over the next few years, but that reflects improved labour availability rather an assumption that there is an ICT led productivity miracle in the making. But we could easily be wrong. Given recent experience, there is clearly some risk of undue pessimism, though it has to be said that past policy errors have more often been the result of too much optimism. One thing is for sure: we can’t afford to sit back and wait for the data to tell us the answer. By the time we have that degree of certainty policy will have moved on. So productivity will remain a key issue for us over the coming years. Conclusion Which brings me to my final challenge for policy makers: how to handle uncertainty in taking and presenting policy decisions. The MPC has met this challenge head on from the beginning. Within the discipline imposed by a shared inflation target, the Committee has been very open both about uncertainty and about the disagreement that is likely to go with it. Published MPC forecasts have explored rather than glossed over risks and uncertainties. The individual accountability of MPC members reduces the incentive to search for consensus.