When is an inflation
target not an inflation target? When there’s no accountability, says
Clive Crook.
There is no real pressure on the Fed to hit its supposed "target".
When the Bank of England overshoots its inflation target, it has to explain
itself, and it cannot tell the Treasury, "Well, it was only a forecast."
If inflation in 2010 is less than 1.5 percent or more than 2.0 percent, I’m
willing to bet that that is exactly what the Fed will say.
I’m not convinced. For one thing, past inflation is just that – in the
past. Explanations can’t change anything. And in fact no one expected, when
the Bank of England’s inflation-targeting system was put in place, that the
Great Moderation would preclude the Bank’s Governor from having to write any
letters at all for years on end. The stigma associated with that letter comes
not from the inflation-targeting regime itself, but rather from the fact that
such letters happen to have been very rare.
But what will happen if the Fed overshot its 2010 inflation forecast? I’m sure
that the Fed will have lots of very good explanations, like "we had no
way of stopping energy prices from passing through into consumer prices when
oil hit $150 a barrel and Congress implemented a carbon tax on top of that",
or something about China. There’s no need for them to pooh-pooh their 2007 forecast
and imply that it really wasn’t very important.